Description
In economics, internationalization has been viewed as a process of increasing involvement of enterprises in international markets
Internationalisation in a Network Based World
- Effects on the Supplier Structure
J. Bäckman & C. Modorato – Rosta January 2005
Avdelning, Institution Division, Department Ekonomiska institutionen 581 83 LINKÖPING
Datum Date 2005-01-20
Språk Language Svenska/Swedish X Engelska/English
Rapporttyp Report category Licentiatavhandling Examensarbete C-uppsats X D-uppsats Övrig rapport ____
ISBN
ISRN LIU-EKI/IEP-D--05/015--SE Serietitel och serienummer Title of series, numbering ISSN
URL för elektronisk version http://www.ep.liu.se/exjobb/eki/2005/iep/015/
Titel Title
Internationalisation in a Network Based World - Effects on the Supplier Structure
Författare Author
Jenny Bäckman & Charlotte Modorato-Rosta
Sammanfattning Abstract The organisational forms of companies have undergone a transformation from a hierarchal structure towards a network based form. The network form has proven to be the best structure for the current competitive environment. With technological advancements in almost every area it has become almost impossible to produce everything “in-house” and still stay competitive. This has caused an increase in the degree of outsourcing parts of the value chain to suppliers. Therefore, the competition has now moved from between companies to between entire value chains. For a manufacturing company, with a large part of the value chain outsourced to suppliers the task of setting up production in a new market brings forth new questions such as: is it possible to move an entire value chain to a new country? The purpose of this thesis is to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company when entering a new market. The purpose was divided into two research questions: How is the internationalisation process performed in a strategic network situation and what factors influence the construction of a supplier structure in a world based on networks? Three multinational companies with a large part of their value chain outsourced to suppliers were chosen for interviews: Ericsson, Scania and Volvo Truck Corporation.
The internationalisation process of a manufacturing company is conducted as follows: the first step is the decision to enter a new market followed by a rather quick set up of a production plant. In this initial phase of the establishment, everything or almost everything is imported which is possible due to a global network of suppliers. The last step depends on the strategic objective with the establishment, either importing will continue or a complete organisation will be established in the country. A complete organisation is in this aspect when the company makes large investments in the market and starts constructing a supplier network, surrounding sales and marketing functions. Factors influencing the internationalising process are: degree of networking, the type and structure of the network surrounding the company; level of knowledge, the accumulated experience of operating in foreign markets; type of market, the characteristics of the market and degree of commitment i.e. will an entire organisation be built up or will importing suffice.
Nyckelord Keyword Supplier structure, internationalisation, network, supplier network, strategic network
Avdelning, Institution Division, Department Ekonomiska institutionen 581 83 LINKÖPING
Datum Date 2005-01-20
Språk Language Svenska/Swedish X Engelska/English
Rapporttyp Report category Licentiatavhandling Examensarbete C-uppsats X D-uppsats Övrig rapport ____
ISBN
ISRN LIU-EKI/IEP-D--05/015--SE Serietitel och serienummer Title of series, numbering ISSN
URL för elektronisk version http://www.ep.liu.se/exjobb/eki/2005/iep/015/
Titel Title
Internationalisering i en nätverksbaserad värld - Effekter på leverantörsstrukturen
Författare Author
Jenny Bäckman & Charlotte Modorato-Rosta
Sammanfattning Organisationsformen hos stora företag har förändrats från hierarkiska strukturer till nätverksbaserade organisationer. Nätverksformen har visat sig var den mest lämpade företagsformen för dagens affärsklimat. Forskning och utveckling har bidragit till att företag inte längre kan producerat allt själva utan måste i större utsträckning samarbeta med sina leverantörer för att bibehålla sin konkurrenskraft. Detta har lett till en ökning av ”outsourcing” hos tillverkandeföretag. Konkurrensen har därmed förflyttats från att vara mellan företag till att vara mellan hela värdekedjor. När en stor del av tillverkningen är utlagd på underleverantörer blir processen av att flytta produktionen utomlands förändrad. Går det, exempelvis, att flytta en hel värdekedja till en ny marknad? Syftet med uppsatsen är att undersöka vilka faktorer som påverkar konstruktionen av ett strategiskt nätverk av underleverantörer för ett tillverkandeföretag vid ett inträde på en ny marknad. Syftet är indelat i två problemfrågor: Hur går internationaliseringsprocessen till i en strategisk nätverkssituation och vilka faktorer påverkar konstruktionen av leverantörsstrukturen i en nätverksbaserad miljö? Tre multinationella företag med stora delar av värdekedjan utlagd på underleverantörer blev intervjuade: Ericsson, Scania och Volvo Lastvagnar. Internationaliseringsprocessen för ett tillverkandeföretag består av följande steg. Beslutet av att starta upp produktion på en ny marknad följs av en snabb uppbyggnad av en hopsättningsfabrik. I början kan allt eller nästan allt importeras eftersom flertalet av leverantörerna är globala och kan
leverera till de flesta marknader utan problem. Det sista steget beror på målsättningen med etableringen, antingen fortsätter företaget att importera eller så bygger man upp en leverantörsstruktur och omkringliggande marknads- och säljfunktioner. Faktorerna som påverkar denna internationaliseringsprocess är: samarbetsformer, nätverksstrukturen som omger företaget; ansamlad kunskap, erfarenheterna av verksamheter utomlands; marknadstypen, säregna drag för marknaden och grad av åtagande dvs. kommer en hel organisation att etableras eller kommer import räcka för att försörja den nya marknaden.
Nyckelord Leverantörsstruktur, nätverk, leverantörsnätverk, strategiska nätverk
List of Abbreviations
~
ASEAN BU CBU CKD FDI GPN HQ IT JV MNC OEM SBU VTC Association of Southeast Asian Nations Business Unit Completely Built Up Completely Knocked Down Foreign Direct Investment Global Production Network Headquarters Information Technology Joint Venture Multinational Corporation Original Equipment Manufacturer Strategic Business Unit Volvo Truck Corporation
Table of Contents
1 INTERNATIONALISATION IN A NETWORK BASED WORLD...... 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 INTRODUCTION ......................................................................................... 1 FROM HIERARCHY TO NETWORK .............................................................. 1 PROBLEM DISCUSSION............................................................................... 4 PURPOSE ................................................................................................... 5 RESEARCH QUESTIONS ............................................................................. 5 DEMARCATIONS ........................................................................................ 5 STRUCTURE .............................................................................................. 6
OUR PATH TOWARDS REACHING A RESULT ................................. 7 2.1 THE SCIENTIFIC APPROACH PATH............................................................. 7 2.2 OUR PATH DURING THE PROCEDURE ........................................................ 9 2.3 PRACTICAL PATH .................................................................................... 11 2.3.1 Analysing the findings ........................................................................ 13 2.4 CRITICISM OF OUR CHOSEN PATHS......................................................... 14 2.4.1 Validity ............................................................................................... 14 2.4.2 Reliability ........................................................................................... 15 2.4.3 Generalisation.................................................................................... 15 2.4.4 Criticisms of Sources ......................................................................... 16
3
THE INTERNATIONALISATION PROCESS IN THEORY.............. 17 3.1 SUPPLY CHAIN OR STRATEGIC NETWORK?............................................. 18 3.1.1 Managing the Supply Chain as a Network ........................................ 19 3.2 PURPOSE OF GOING ABROAD ................................................................... 20 3.2.1 Market Seeker..................................................................................... 20 3.2.2 Resource Seeker ................................................................................. 21 3.2.3 Minimizing the Risks .......................................................................... 21 3.3 INTERNATIONALISATION PROCESS .......................................................... 22 3.3.1 Internationalisation from a Network Perspective.............................. 23 3.3.2 Emerging Markets.............................................................................. 25 3.4 THE PARADOXES .................................................................................... 25 3.4.1 High vs. Low Involvement.................................................................. 26 3.4.2 Concentration vs. Dispersion............................................................. 29 3.4.3 Control vs. Autonomy......................................................................... 31
4
INTERNATIONALISATION PROCESS IN PRACTICE.................... 35 4.1 PRESENTATION OF THE INTERVIEWEES AND THE COMPANIES ................. 35 4.2 TIER STRUCTURE .................................................................................... 36 4.3 INTERNATIONALISATION PROCESS .......................................................... 36 4.4 THE PARADOXES .................................................................................... 41 4.4.1 High vs. Low Involvement.................................................................. 41 4.4.2 Concentration vs. Dispersion............................................................. 46 4.4.3 Control vs. Autonomy......................................................................... 47
5
REACHING THE END OF THE PATH................................................. 50 5.1 NETWORK ASPECTS ................................................................................. 50 5.2 THE INTERNATIONALISATION PROCESS TODAY ...................................... 52 5.3 THE PARADOXES .................................................................................... 55 5.3.1 High vs. Low Involvement.................................................................. 55 5.3.2 Concentration vs. Dispersion............................................................. 57 5.3.3 Control vs. Autonomy......................................................................... 60
6
THE END OF THE PATH ........................................................................ 64 6.1 6.2 6.3 6.4 - HOW IS THE INTERNATIONALISATION PROCESS PERFORMED IN A STRATEGIC NETWORK SITUATION? .......................................................... 64 - WHAT FACTORS INFLUENCE THE CONSTRUCTION OF A SUPPLIER STRUCTURE IN A WORLD BASED ON NETWORKS?..................................... 65 FULFILLING OUR PURPOSE ...................................................................... 67 FURTHER INTEREST OF STUDY ................................................................ 68
7 8
BIBLIOGRAPHY....................................................................................... 69 APPENDIX ................................................................................................. 75
List of Figures
FIGURE 2.1 COMPONENTS OF DATA ANALYSIS: AN INTERACTIVE MODEL .............. 13 FIGURE 3.1 THE SUPPLY CHAIN AS A NETWORK .................................................. 19 FIGURE 3.2 SUPPLIER NETWORK STRUCTURE ....................................................... 26 FIGURE 3.3 HIGH AND LOW INVOLVEMENT EFFECTS ........................................... 29 FIGURE 3.4 CONCENTRATION AND DISPERSION EFFECTS ..................................... 31 FIGURE 3.5 AUTONOMY AND CONTROL EFFECTS ................................................. 34 FIGURE 4.1 TIER STRUCTURE ............................................................................... 36 FIGURE 4.2 SCANIA'S SUPPLIER CATEGORIES SOURCE: SCANIA .......................... 43 FIGURE 4.3 SCANIA'S MATRIX FOR PROCUREMENT SOURCE: SCANIA ................. 44 FIGURE 5.1 HIGH AND LOW INVOLVEMENT EFFECTS ........................................... 57 FIGURE 5.2 CONCENTRATION AND DISPERSION EFFECTS ..................................... 60 FIGURE 5.3 AUTONOMY AND CONTROL EFFECTS ................................................. 63 FIGUR 6.1 ESTABLISHMENT CHAIN ....................................................................... 64
List of Tables
TABLE 2.1 PRESENTATION OF THE COMPANIES .................................................... 11 TABLE 2.2 PRESENTATION OF THE INTERVIEWEES ................................................ 11 TABLE 3.1 CONTROL OVER SUBSIDIARY OPERATIONS IN A MNC ........................ 33 TABLE 4.1 PRESENTATION OF INTERVIEWEES ....................................................... 35 TABLE 4.2 COMPANY PRESENTATION ................................................................... 35
1 Internationalisation in a Network Based World
~
1.1 Introduction
The organisational forms of companies have undergone a successive change from a hierarchical structure to a more decentralised and organic structure, where quick adaptation to the environment is possible. This chapter starts with a presentation of theories dealing with the organisational form of companies and their development into a network structure. This leads to the problem discussion regarding internationalisation in a network-based world.
1.2 From Hierarchy to Network
In their book Organisation and Environment from 1967, Lawrence and Lorsch provide, a short review of what they call classical organisational theories such as those of Urwick and Fayol originating in the 1920s. These theories recommend ‘a highly structured authoritarian system’ for large corporations, where the power is located at the top and successively diminishes for each descending level. Basically, highly formalised structures with a commanding and controlling leadership style will lead to better performance. These theories however need to be adapted to the advances in science and related technology industries and to the increasing uncertainty in the competitive environment, according to Lawrence and Lorsch (1967). The authors suggest that organisations need to reduce the degree of structure and lengthen their time horizon in order to be competitive. Lawrence and Lorsch (1967) have seen indications that companies with a less hierarchical structure are more suitable to manage uncertain and diverse environmental conditions. In their view, successful organisations are better at adapting to the environmental demands than their less successful competitors. The results from the research performed by Lawrence and Lorsch regarding the environment’s effect on the organisational design, is in accordance with results reached by Burns and Stalker in their research performed in the 1950s. Burns and Stalker (1994) examined patterns of management practices related to the external environment and they found two types of management methods: the mechanistic and the organic. The former is a type of hierarchy well suited for a stable environment, while the latter is more decentralised where communication takes place across levels of management, preferable for a company operating in
~1~
an unstable environment. In line with this thinking are Chandler’s theories of strategy and structure. The organisational structure follows and is determined by strategic decisions, according to Chandler (1962), and new strategic choices derives from environmental changes. “Strategic growth resulted from an awareness of the opportunities and needs – created by changing population, income and technology – to employ existing or expanding resources more profitably.” Chandler, 1962 (p.15) In short, Chandler (1962) reasons that environmental changes influence the strategy which in turn influences the choice of the appropriate organisational structure. Different kinds of organisations are therefore necessary for effectively handling different strategies and environments. In a stable environment, a hierarchical structure can be successful. However in other circumstances, the disadvantages of such a structure, for example trusting a few key actors with complex decisions, is obvious. The organisational structure of a company can, as expressed by Lawrence and Lorsch (1967), be seen as a system. As the system grows, it becomes differentiated into different parts that need to remain integrated in order for the whole system to function. An important function of any system is adjustment to the world outside. Lawrence and Lorsch’s (1967) thoughts of the future are, to a large extent still valid today, when they claim that the speed of technological change is increasing resulting in more complex products and production processes. Corporations are becoming more multinational as they are expanding their business activities to a global scale. These trends have just started, and according to Lawrence and Lorsch (1967), forecasts point at an acceleration in the future. During the 1970s, the internationalisation process of manufacturing companies, as described by Rudberg and Olhager (2003), was highly dependent on achieving economies of scale. Products were manufactured on the home market and exported to international clients. If the international business was successful, the company established sales offices around the world. However, there was a need for more manufacturing facilities and companies developed into multiplant organisations. Even if markets were becoming more global during this period, manufacturing was still quite geographically concentrated. Despite the multi-plant structure, the organisation was managed according to the old singlefactory strategy, i.e. each plant was treated separately. During the late 1980s,
~2~
globalisation increased the competitive pressure and in order to stay competitive, companies needed to establish on a wider international basis. Factories could not longer be treated as seperate entities; there was a need for a more holistic view where each factory influences and is influenced by the entire network of factories. Companies started to think in terms of networks, since the organisational form had evolved from national manufacturing into regional and global manufacturing (Skjoett-Larsen, 2000). Ernst and Kim (2002) present three globalisation drivers behind this shift in industrial organisation: institutional change through liberalisation, information technology (IT) and competition. The first driving force, liberalisation, has sparked an expansion of trade and foreign direct investment (FDI). The overall result has been a considerable reduction of costs and risks of international transactions. The development of IT has increased the mobility, making it possible to spread company-specific resources across national boundaries as well as link and coordinate economic transactions between distant locations. One of the first effects of using computers as means of communication was the “break-up” of the traditional value chain, for example, the importance of middlemen distributing goods decreased significantly (Kelly, 1999). The third driver is a change in the dynamics of competition caused by the liberalisation and IT development. The geographic scope of competition has increased, meaning the competition now cuts across country borders. Laurence (2000) claims that companies no longer see separate country markets but view their potential markets in regional terms, such as the entire European Union as one market. Furthermore Ernst and Kim (2002) claim, it is impossible for companies, even market leaders, to internally generate all the capabilities needed to cope with the global competition. Skjoett-Larsen (2000) even argues that the largest potential for improvements is found outside the corporation. According to Gadde and Snehota (2000), the relationships and linkages a company can create with external organisations are a new source of competitive advantage. Therefore the success of a company is highly related to its ability to source specialized capabilities outside the firm (Ernst & Kim, 2002). In order to benefit from the suppliers’ special knowledge, buying companies are involving the suppliers at a much earlier stage, e.g. in the product development phase (Aronsson et al, 2003). The organisational form of manufacturing companies have therefore evolved further, from only seeing the own company configuration as a network into regarding the company as a part of a dispersed network of resources, external as well as internal (Ernst & Kim, 2002; Rudberg & Olhager, 2003). This network configuration provides the companies with an increased flexibility necessary to respond to market opportunities (Ernst & Kim,
~3~
2002; Gries et al 1999). Saffo in Kelly (1999) calls this a transition from value chain into value web while Castells (1996) simply state: “Networks are the fundamental stuff of which new organizations are and will be made.” Castells, 1996 (p.168) There is coherence in the literature regarding the change in the organisational form of the manufacturing companies. However, there seems to be an inconsistency in what to call this phenomenon. Rudberg and Olhager (2003) termed it manufacturing network, Gries et al (1999) named it the new manufacturing enterprise, Castells (1996) labelled it the network enterprise, while Ernst and Kim (2002) called it the global production network (GPN).
1.3 Problem discussion
In this new network society the focus is on the network a company is included in as oppose to the conventional view where the attention was on the company as a single entity (Kelly, 1999). Traditionally, when discussing competition it is referred to the competition between companies, today however, the competition is between entire value chains (Aronsson et al, 2003). In this new form of competition it is logical that the choice and selection of suppliers is increasing in strategic importance. Including the ‘right’ suppliers in the value chain can be the factor that either leads to the road of success or contributes to the downfall of a company (C.f Håkansson et al, 1993). Christopher (1998) claims that technological change and production efficiencies have resulted in a majority of companies, in almost every industry, are now able to produce greater quantity to a lower cost than before. In order to stay competitive, companies must continually seek ways in which costs can be reduced, e.g. optimise the supply chain or search for low cost production locations (ibid). What does the internationalisation process, in terms of moving production into a new country, look like when the competition has changed from between corporations to between entire value chains? In order to benefit from lower production costs it is not only the company that needs to move, it is the entire network. Therefore, the issue of internationalisation, now under different circumstances, brings forth new questions. Is a company capable of moving an entire network or can they only move parts of it? If a company cannot move the entire network, how do they fill the missing gaps in their supply chain structure? In other words, what issues are critical when a manufacturing company decides to enter a new market, seeing their high dependency on the other actors in their
~4~
immediate network? After reviewing literature about the internationalisation process, we have found that there is a scarce amount of theories that offer an explanation of this process from a strategic network perspective1, which leads us to our purpose.
1.4 Purpose
The purpose is to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company when entering a new market.
1.5 Research Questions
In order to be able to fulfil our purpose we have constructed two research questions that will guide us through the study. 1. How is the internationalisation process performed in a strategic network situation? 2. What factors influence the construction of a supplier structure in a world based on networks? Seeing that internationalisation in networks is a rather recent phenomenon our focus will be on countries and markets that recently have been opened for foreign investments, i.e. emerging markets such as China or Eastern Europe.
1.6 Demarcations
This master thesis will focus on the internationalisation process of manufacturing companies in terms of establishing a network in a foreign market. Instead of providing a more general business network perspective, we have chosen to narrow down the scope of this thesis and only focus on strategic networks in this process. We will not treat any issues regarding other aspects of the internationalisation process such as marketing, country/location selection, cultural differences etc.
1
See section 3.1 for explanation of the term strategic network
~5~
1.7 Structure
Chapter 1 Internationalisation in a Network Based World Presentation of the study and the area of interest
Chapter 2 Our Path towards Reaching a Result A description of how the research was performed
Chapter 3 Internationalisation Process in Theory Theoretical findings
Chapter 4 Internationalisation Process in Practice – The Path of Three Companies Presentation of the empirical material
Chapter 5 Reaching the End of the Path Analysis
Chapter 6 The End of the Path Results
Appendix Interview questionnaires
~6~
2 Our Path towards Reaching a Result
~
In our research we were faced with different choices, crossroads, which would guide our study in different directions. This chapter presents our chosen paths in the multitude of research options.
2.1 The Scientific Approach Path
Our role as researchers for this master thesis is to provide knowledge in the cross section between the two subjects of internationalisation and supply chain management. Knowledge is according to Amaratunga et al (2002), produced through research. Scientific knowledge is gained by using scientific methods in order to produce reliable results (Patel & Tebelius, 1987). To collect the data for this thesis we have used scientific methods as well as theories with a scientific background, hence the knowledge we present is intended to be scientific. The goal of our research is to fulfil our purpose; therefore all our methodological decisions are based on what we have concluded to be the most appropriate alternative in order to achieve that goal. The chosen scientific approach of a research will affect the development and outcome of the study (Patel & Tebelius, 1987). The starting point of this thesis lies in the results of our bachelor thesis2. We wanted to develop and complement our findings by further developing our own knowledge within the chosen subject. In combination with interviews, we wanted to gain a more thorough understanding of the internationalisation process of manufacturing companies in a network based world, in order to find out how the construction of the supplier structure is influenced. This leads us towards the hermeneutic approach in our quest for understanding this phenomenon (C.f. Arbnor & Bjerke, 1997). The hermeneutic view has developed from solely an interpretation of texts into including interpretations of acts, symbols and other social phenomena that can be incorporated within the social sciences (Patel & Davidson, 2003; Hartman, 1998). In line with this thinking comes the idea that the world is socially constructed and that the researcher must utilize a subjective approach (Patel & Tebelius, 1987). Our opinion is that the result of a study is always conditioned by the values, prior knowledge and experiences of the researchers. Our prior knowledge was the one gained during our bachelor thesis. This knowledge included theoretical aspects as well as empirical ones seeing that some of the
2
Constructing a Supplier Network in China – The Logic Behind the Strategic Options (2004)
~7~
companies included in this thesis also were a part of our prior research. We were therefore familiar with the interviewed companies which facilitated the data collection process, since we were to some extent already acquainted with their terminology and their products. Holme and Solvang (1997) claim that research within social sciences cannot be completely neutral, and it is impossible to be completely separated from one’s own views and thoughts. The interpretations of the collected data will therefore be influenced by our previous knowledge and experiences as well as by the knowledge we acquired during this process. In the hermeneutic view, it is the previous knowledge that renders an interpretation possible (Patel & Tebelius, 1987) and it is impossible to be completely unbiased towards the objects of study (Holme & Solvang, 1997). However, the fact that we are two authors to this thesis, as well as the guidance from two mentors in combination with several meetings with our study group, lead us to regard other viewpoints than our own thus resulting in a wider perspective. Furthermore, we strived for an objective and matter-of-fact approach in our method as well as in our presentation of the research, in order to limit our influence on the final result. Even though we would have liked to enter this research with a clean slate, our research questions would still have pointed us in a certain direction, or as Popper (1965) in Atkinson and Shaffir (1998) puts it: “Observation is always selective.”3. Therefore the aim of this chapter is to convey our perspective and the methods which have provided the basis for this research to the reader (C.f. Atkinson & Shaffir, 1998). This will facilitate for the reader to form an opinion of the results we have reached. During our research, we have found that the hermeneutic approach often is put in contrast to the positivistic view point; therefore we have chosen to briefly present this approach. Although, bear in mind, is that there are other scientific approaches as well, for example, the phenomenological (interpretive) (C.f. Amartunga et al, 2002). However, these will not be dealt with, since the hermeneutic and the positivistic seems to be the two dominating schools. The positivistic approach states that there are only two ways of reaching knowledge; through our five senses and through what we can conclude with our common sense by discussing and using our logical thinking (Thurén, 1998). Scientific facts should always be objective and measurable. The positivistic approach eliminates the human factor from the research and therefore rejects the hermeneutic method of investigation, since it is based on human interactions (Kvale, 1997). In the following section we will explain why human interactions were important to our research which highlights the usefulness of a hermeneutic approach rather than the positivistic.
3
p. 52
~8~
2.2 Our Path during the Procedure
Since the idea of this thesis originates in our previous research, a deductive study was the most appropriate way of performing this task. A deductive approach implies working with theories as a starting point, in order to acquire knowledge about a certain phenomenon, further gather empirical material and see if the theory concurs with what is observed (Jacobsen, 2002). Our first step was to explore some of the theories used in our bachelor thesis further, and then to collect empirical material. The data collection took place about half way through the study and influenced the theoretical frame of reference, when new information was added. Therefore, our research has traits of an inductive approach as well. Summing up, the research questions in the previous chapter are theory driven, whereas the research following the empirical collection part is a combination of inductive and deductive research. With our purpose in mind we chose to perform a qualitative study, therefore all empirical material was assembled through personal interviews. Our opinion is that a quantitative study provides too static answers and given that we do not have the complete knowledge of the situation in advance, we need the possibility to have an open dialogue with the respondents. As a consequence, the interviews took the form of a discussion rather than simple questioning and answering, since we wanted to know how these companies reason when entering a new market. As Amaratunga et al (2002) describe it: qualitative data has a strong potential for revealing complexity, which is why we have chosen the qualitative approach, seeing that it allows us to have dialogues with the interviewees. Amaratunga et al (2002) also propose to use triangulation, i.e. a combination of quantitative and qualitative methods, to increase the credibility of a study. The scope of our study makes it impossible for us to perform a triangulation. However if we, in this study, are able to identify influencing factors on the construction of a supplier structure on a new market, a quantitative study might prove if those factors are applicable to a wide variety of companies with statistic accuracy. Therefore our suggestion is to carry out a quantitative study as a next step, thus accomplishing a triangulation of our study. Our research questions are of a quite complex character and we have therefore chosen to study only a few companies, i.e. cases, in order to get a deeper understanding of the area of study. There is no general definition of what a case study is and how it should be performed (Jacobsen 2002). However, a definition that we think describes our method of investigation is portrayed by Andersen (1997) in Jacobsen (2002): a case study is about choosing one or a couple of cases that are being put in focus for detailed investigation. According to Bell (2000), there is a great advantage of doing a case study, since it gives the
~9~
researcher the opportunity to concentrate on a special event and to see what factors influence that particular phenomenon. This type of information can sometimes be overlooked in a survey investigation; nevertheless, it can still be highly influential for how a system or an organisation functions. The chosen cases were selected on the basis of what we believed would be the most substantial for our study. This is according to Halvorsen (1992) a common way of gathering qualitative data, especially when the selection is small. It was important to choose wisely in order to get the appropriate information; therefore the companies we contacted had to fulfil certain criteria in order to be included in the research: - Multinational corporation (MNC) A large presence on several markets implies an extensive experience of the internationalisation process. - Certain percentage of the value adding activities are outsourced and performed by the suppliers This criterion is essential in order to gain the network perspective in the internationalisation process. - Offers a tangible product and not a service Producing companies with complex products are dependent on suppliers to a higher degree than those who provide a service. Furthermore, most of the internationalisation theories are based on manufacturing companies. - Headquarters in Sweden The last requirement is of a practical nature. The persons most suited for our research are probably to be found in higher positions within the company since the character of our study regards strategic decisions taken at a high management level. Seeing that we do not have the possibility to do extensive travelling, the headquarters (HQ) must be situated within Sweden. We also preferred meeting persons face to face instead of conducting a series of telephone interviews or corresponding via email. The experiences from our bachelor thesis is, that a meeting in person renders more information and offers better possibilities for both of us to participate and ask questions than telephone interviews.
~ 10 ~
2.3 Practical Path
The empirical part of the study was gathered through interviews with three companies: Ericsson, Scania, and Volvo Truck Corporation (VTC). These companies all fulfil our selection criteria:
Global Presence Ericsson Scania Volvo Truck Corporation Presence: 140 countries Production: 3 countries Presence: 100 countries Production: 5 countries Presence: 130 countries Production: 12 countries Outsourced activities4 85 % 50 % 75 % Product Systems Trucks Trucks Location of HQ Stockholm Södertälje Gothenburg
Table 2.1 Presentation of the Companies
Respondents can be classified, according to Jacobsen (2000), as primary or secondary sources. A primary source is someone that has experienced the process or has been a part of a company for a long time, while a secondary source is someone that has not personally been involved in the process (ibid). The interviewees have all obtained high positions in their companies (see table 2.2), which indicate competence within their line of business. Using the classification of Jacobsen (2000), all of our respondents are primary sources.
Ericsson Anna Ahnfalk Thomas Andersson Scania Volvo Truck Corporation Marianne Pettersson Olle Wengelin Alf Karlsson Lennart Carlsson Tryggve Kristenson Manager Electromechanics Group Function Sourcing Manager Electronic Manufacturing Services Group Function Sourcing Process Engineer Purchasing Purchasing Manager Supplier Improvement Coordinator International Manufacturing Director Business Strategy Manager
Table 2.2 Presentation of the Interviewees
Since all of our respondents can be classified as primary sources this justifies, according to us, the rather small number of interviewees. By talking to the ‘right’ persons the selection of interviewees does not need to be large. Our opinion is that more respondents do not necessarily mean better information.
4
Percentage of the value of the final product added by suppliers
~ 11 ~
2.3.1 Interviews Lundahl and Skärvad (1999) use the term structured interview, if the interview fulfils two criteria: the interviewee should be informed in advance about the objective of the interview and the interview should be focused on information gathering. Our interviews fulfil these criteria and can therefore be regarded as structured interviews. The opposite of a structured interview is a free interview; this type of interview often focuses on opinions, attitudes and values of the interviewee (Lundahl & Skärvad, 1999). A few days before the interviews, we sent out the questionnaire to the respondents in order to give them the possibility to prepare. Since our questions were covering more than one area, this gave the respondents the opportunity to consult with other colleagues if there were questions that they could not answer fully themselves. We believe that sending out the questions in advance only had a positive effect since it, in certain cases, resulted in an interview with different persons than those who had initially received the questions. This gave us the opportunity to meet with those most suited to answer our questions. The interviews took between one and two hours and we were both present during all interviews. To make sure that no information was lost during the conversation, we used a tape recorder which enabled both of us to fully participate in the discussions. Jacobsen (2002) claims that a tape recorder can affect the respondent in a negative way, making the respondent feel uncomfortable. We believe that the tape recorder did not have any significant influence on the respondents. If there were negative effects, we consider the benefits from recording to outweigh the disadvantages. We would never have been able to collect as much information by only taking notes. Jacobsen (2002) also stresses that recording an interview is the most accurate way of register data. Interviews can be classified by their degree of standardisation (Lundahl & Skärvad, 1999). A high degree of standardisation implies that both the questions as well as the order of the questions are decided in advance (ibid). All our questions, as well as their order, were decided in advance and all companies were asked the same questions. This gives our interview a high degree of standardisation. However, Lundahl and Skärvad (1999) continue by explaining that in order to keep a high degree of standardisation it is important that each interview is conducted in the same manner, i.e. the same questions will be asked in the same order. Even though we had the exact same questionnaire for all the interviews, the order of the questions changed in the different interviews due to the fact that we asked follow up questions that sometimes lead us in to other questions than the intended question on the questionnaire. Lundahl and Skärvad (1999) name this type of interview as semi-standardised, which is therefore the
~ 12 ~
most suited term for the types of interviews we performed. A non-standardised interview implies a greater freedom in the type of questions used as well as their order (ibid). We chose not to transcribe the interviews word by word since we considered this task to be too time consuming. However, after the interviews we both listened through the interviews and made thorough notes on those parts of the discussions that were of interest to us. If there were parts of the interviews that were unclear or not fully developed, we contacted the respondents again for further explanation. 2.3.2 Analysing the findings Qualitative data analysis can be, according to Miles and Huberman (1994) in Amaratunga et al (2002), divided in three simultaneous activities: data reduction, data display and conclusion drawing and verifying. The first activity entails selecting, focusing, simplifying and transforming the collected material and occurs continuously during the research. The creation and use of the way in which the data is displayed, can facilitate the analysis. The last activity, conclusion drawing and verifying, cannot be finalised until the entire material has been collected. Miles and Huberman (1994) in Amaratunga et al (2002) present these three activities together with the data collection process as a interactive, cyclical process as seen in figure 2.1 below.
Data collection
Data display
Data reduction
Conclusions: Drawing/ verifying
Figure 2.1 Components of data analysis: an interactive model Source: Amaratunga et al (2002), p.28
Our opinion is that this model presents a fair view of our process of analysing the empirical findings in combination with the theoretical material. The analysis
~ 13 ~
in the last chapter is therefore the result of this cyclic process, which was ongoing during the whole of this thesis.
2.4 Criticism of Our Chosen Paths
Even though we are not positivists, there are a few concepts from this scientific approach that we found were relevant for this type of study, i.e. validity, reliability and generalisation. 2.4.1 Validity Validity is defined by Arbnor and Bjerke (1997) as “…the absence of systematic bias.” 5 . Gummeson (2000) offers a slightly extended definition saying that validity is “…the extent to which researchers are able to use their method to study what they had sought to study…”6. A qualitative study captures the sought out area of interests and is, according to us, the best suited approach that renders possible an understanding of the internationalisation process of manufacturing companies in a network based world, which is necessary in order to be able to identify how the construction of the supplier network is influenced. Befring (1994) states that it is possible to increase the validity by allowing the respondent to express herself/himself in the most comfortable way; which is in our opinion achieved through interviews. Validity is usually divided along two dimensions: internal and external (Eriksson & Wiederheim-Paul, 2001). Internal validity, sometimes also referred to as relevance, is related to the relationship between a study and existing theory within the area (Arbnor & Bjerke, 1997), while external validity measures whether the gathered information is compatible to reality (Eriksson & Wiederheim-Paul, 2001). For us, the internal validity will be most important, since we have used the combination of two different theories within separate areas to shed light on a practical phenomenon. By depicting a practical situation, we have showed the relevance of combining internationalisation theories and supply chain management. Whether we have managed to attain external validity is difficult for us to say. However, all three companies provided us with extensive information and, in our opinion, relevant information. We have therefore no reason to believe that any of our respondents answered untruthfully or deliberately withheld information. Consequently, we are convinced that the material received represents adequate description of how each company experiences its situation.
5 6
p. 233 p. 91
~ 14 ~
2.4.2 Reliability Reliability is about presenting a true and fair view, which can easily be controlled by doubling or repeating the measurements (Arbnor & Bjerke, 1997). In other words, for a study to have a high degree of reliability, similar results should be obtained if the research was conducted again. When using qualitative methods, the reliability issue can be problematic since the interpretation and analysis might be influenced by the researcher. To ensure the reliability of our study, we undertook certain measures such as: both of us were present during the interviews; we used standardised questions; and we conducted the interviews in a calm environment with sufficient time to our disposal (C.f. Kvale 1997; Patel & Davidson, 2003). What can be discussed, however, is how we have interpreted and handled the information received from our respondents. In order to strengthen the reliability, we returned the empirical part of the thesis to the respondents, so they could inform us if there were parts that we had misunderstood. We received responses from all informants, which not only increases the reliability of the empirical material but also diminishes our influence on the empirical findings. 2.4.3 Generalisation The scientific significance of case studies is often questioned arguing the difficulty in making generalisations from the results (Lukka, 1995). Furthermore, case researchers themselves are modest and usually claim that results based on case studies should be regarded somewhat cautiously since they only apply to the studied case (ibid). We do agree to some extent with the critics and our opinion is that our study cannot alone be used and generalised to all other global corporations with large parts of the value chain outsourced. We look upon our research as a piece in a puzzle and believe that our study, interwoven with other research, can bring forth a better understanding of the studied phenomena. Lukka, (1995) states that “…generalizations always presuppose that the future structurally corresponds to the past.” 7 , which is another argument that we believe should be taken into consideration, seeing that today’s business environment is changing fast and what seems to be the reality of today might not be the reality of tomorrow. This is particularly true for the business environment in emerging markets, where the market development is influencing corporations all over the world.
7
p.73
~ 15 ~
2.4.4 Criticisms of Sources To increase the credibility of a study, it is important to critically examine the resources (Befring, 1994). The author continues explaining that credibility is closely related to the concepts of validity and reliability, when the research is based on empirical data. The point of having a section with criticism of the sources, is to underline the significance and relevance of the sources for our research. As already mentioned, our primary data is collected via interviews and we believe that the information received was relevant considering the respondents’ position and experience. Furthermore, the fact that we interviewed several persons from each company gave us both broader and in certain areas more precise information. In our search for secondary data, we have used the university library database. We have only utilized Internet sources when searching for company specific information. The information gathered via the companies’ sites were later confirmed during the interviews. In the selection of printed sources, we have paid extra attention to find information that appeared reliable. According to Jacobsen (2002), the quality of a source is depending on the knowledge and competence the author possesses and source should be used individually. In order to get the best picture of a phenomenon, the researcher should always use at least two sources complementing each other, which is something we have strived for throughout the whole thesis. Befring (1994) suggests that it is also important to have in mind the year the article or book was written as well as the purpose. We have therefore aimed to use well-known authors within the area of interest, which in certain aspects lead us towards books published several decades ago. Even though some of the books used in this thesis are rather old, the sheer age of them does not imply that they are inaccurate.
~ 16 ~
3 The Internationalisation Process in Theory
~
“The strategies of modern multinational corporations are no longer shaped and conditioned by reasons of state but, rather, by the desire and - the need - to serve attractive markets wherever they exist and to tap attractive pools of resources wherever they sit.” Ohmae, 1995 (p. 3) This statement highlights the importance of a global presence, not only to serve markets, but also to be able to reach sought after resources in order to stay profitable. Consequently, in global business assembly plants or manufacturing facilities are spread over a wide geographic area, which means that materials and components are usually procured from more than one country (Christopher, 1998). The advantage of outsourcing is that complementary knowledge is brought into the company by external actors (Håkansson et al, 1993). When a company has certain activities outsourced it is important, according to Håkansson et al (1993), to facilitate the integration of the activities that take place outside the company with the ones within the company. Usually a company lets a supplier develop certain systems 8 or components, while they keep the development of key systems or components themselves. The current trend, explained by Christopher (1998), implies that global firms will dominate most markets and the role of national companies will be to serve unique local demands. For global players, the management of the logistics process has therefore become essential and the difference between success and failure is dependent on the companies’ ability to optimize the global pipeline. Logistics can now be seen as a source of competitive advantage, according to Greis et al (1999). The answer to the first research question will give an understanding of the internationalisation process of manufacturing companies, when a large part of the value-adding chain is outsourced. Therefore the first section of this chapter is structured as follows: first there is a short explanation of the term supply chain and strategic network which is followed by a passage of internationalisation aspects such as the purpose of going abroad, internationalisation process and internationalisation from a network perspective. This section is concluded by a short definition of an emerging market. The second part of this chapter holds a presentation of the paradoxes that were
8
A supplier that produces a compete system is referred to as system supplier
~ 17 ~
identified in our bachelor thesis as factors influencing the construction of a supplier network.
3.1 Supply Chain or Strategic Network?
Traditionally, companies have worked independently, only focusing on their own business in order to beat the competition (Christopher, 1998). As mentioned in the introduction chapter, companies are now becoming more dependent on their suppliers due to increased outsourcing. This creates a shift in the way companies are governed; large benefits can now be gained by cooperating within the supply chain (Christopher, 1998). The author continues explaining that the idea of cooperating with the suppliers is termed supply chain management where the focus is on the management of relationships. A successful supply chain management strategy results in profits for all involved parties, however in order to achieve this, trust is essential. Another important issue for companies is to not be too ‘self-centred’ and to think in terms of benefits for the entire supply chain. No benefits can be gained by transferring cost within the supply chain, because in the long run the end user will pay all costs. Opportunist behaviour only renders the supply chain ineffective and cost reductions should not be at the expense of other members in the network. Aitken (1998) in Christopher (1998) defines a supply chain as: “A network of connected and interdependent organisations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users.” Christopher, 1998 (p.19) Thus a supply chain can be seen as a network, as illustrated in figure 3.1 below. Although since this type of network is coupled with business activities it should, according to Forsgren and Johanson (1992), be classified as a business network in order to separate it from other types of networks, such as social networks. However, an additional distinction must be made between different types of business networks. The business network emerges over time through interaction between several autonomous actors (Forsgren & Johanson, 1992), which is not the case regarding the supply chain type of network. A supply chain network is intentionally created in order to achieve a profitable outcome for all parties in the chain (Christopher, 1998). A network that is deliberately created in order to fulfil a certain purpose is a strategic network, according to Klint & Sjöberg (2003). Consequently, supply chain or strategic networks can be used regarding
~ 18 ~
the same phenomenon and during this thesis the two terms will be used alternatively.
Figure 3.1 The Supply Chain as a Network Source: Christopher (1998), p.18
3.1.1 Managing the Supply Chain as a Network The buying firm is at the centre of an interdependent network of suppliers (Christopher, 1998). The author continues by explaining that this composition of companies is based on matching capabilities and competences among companies. Through relationships between companies and organisations, activities are organised in certain patterns (Håkansson et al, 1993). The patterns are not static and are constantly changing, influenced by the actions of the firms involved. The business activities of a single company are adjusted to fit this pattern (ibid). Christopher (1998) claims that in order to manage such a structure, there is a requirement for different skills and priorities compared to those needed traditionally, when companies competed on firm to firm basis. A manufacturing company is in need of a strategic coordination in their network of production facilities (Prahalad & Doz, 1987). When the competition is between supply chains, focusing on internal processes and the management of the network is essential, in order to achieve market leadership (Christopher, 1998). The author presents three significant challenges facing companies in this new competitive situation. Firstly, there is a much greater need for a higher level of joint strategy development. This implies that the members of the network must collectively form strategic goals for the network. Secondly, there is a requirement for the members of the network to stop thinking in terms of selfinterest and take on a more holistic approach. Thirdly, in order to make the network function to its fullest potential, a transparency and visibility of relevant information all through the network is necessary. Open-book accounting is an example of transparency, where cost data is shared and each member’s profit is visible to the others.
~ 19 ~
Every business network is a product of its history and Håkansson et al (1993), point out that time has in recent years increased in importance as a strategic factor. The authors demonstrate the time factor with an example: development is dependent on time since it, in a network situation, usually takes place as interplay between two actors. When the development takes place through interaction with outside parties, certain coordination between the units is necessary. The choice of the external parties is crucial and it is important that the other parties are interested in building and sustaining close relationships. The development process will in a certain aspect be dependent on how well a company manages its surrounding network. Networks in general can be characterized by the strength of connections or ties among the involved members (Mohrman et al, 2003). Strong ties, also sometimes referred to as a strong network, imply higher quantity, quality and frequency of interaction, while weak ties, i.e. a weak network, facilitate exchange among a larger number of members and allow groups to concentrate on general goals (ibid).
3.2 Purpose of going abroad
We believe that the purpose of going into a new market will influence the way a company chooses to construct their organisation. Supplying only the new market, as opposed to the entire world, should suggest different strategies and constructions of the supply chain. 3.2.1 Market Seeker In the market seeker strategy, a company decides to enter a foreign market with the primary goal to expand their sales (Cardone-Riportella et al, 2003). The authors continue by explaining that the selection of the market is based on which country holds the best economic potentials. As markets mature, the companies that favour this strategy move on to new markets (ibid). Daniels et al (2004) state that sometimes companies are forced to enter a market in order to serve it. This happens, for example, when transportation costs are high, when the products need to be adapted to local requirements or when there are trade restrictions such as high import tariffs. Therefore, these companies are also classified as market seekers.
~ 20 ~
3.2.2 Resource Seeker Daniels et al (2004) explain that a resource seeking company enters a foreign market in search for resources that are not available on the domestic market or resources that might reduce their production costs. The resources can be parts and components as well as intangible resources such as technological know-how and information. Some companies set up production abroad to profit from lowwage labour. The resources can enable a company to improve the quality and the possibility to differentiate from competitors; which in the end may lead to a larger market share as well as increased profits. 3.2.3 Minimizing the Risks Following the customers to secure the business and preserve the business relationship is a common motive for entering a new market (Gattorna & Walters, 1996). Johanson et al (2002) explain that this strategy is most often used by companies that sell their products or services to other companies. The customers may already be foreign or have a well established foreign trade. This implies that information about the foreign market can be submitted to the company in a secure manner, which will facilitate the internationalisation process. The initiative can be either an invitation from a customer to join an existing network or a demand, where the supplier would lose the business on the home market unless they follow. The benefit of this strategy is that the suppliers already have some information about the market, which decreases the costs as well as the risks. The strategy is often found in the automotive industry and durable industries (Gattorna & Walters, 1996). Within oligopolistic industries, FDI in a certain country made by one actor is soon followed by others (Daniels et al, 2004). These companies tend to have a significant amount of knowledge about internationalisation and they are also quite often a part of international networks (Johanson et al, 2002). By the establishment in many markets, companies can obtain economies of scale and therefore reduce costs (ibid). Johanson et al (2002) named this strategy “follow the leader”, while Daniels et al (2004), simply call it a strategy to prevent competitors’ advantage.
~ 21 ~
3.3 Internationalisation Process
The internationalisation process is explained by Johanson and Vahlne (1977) as “…the process in which the firm gradually increases their international involvement. “9. Forsgren and Johanson (1992) further explain this procedure as a growth process resulting from an interplay between a knowledge development process and a commitment process. Johanson et al (2002), describe the establishment chain, which explains the phases a company normally goes through when entering a new market: Export Æ independent representative (agent) Æ sales subsidiary Æ production According to Johanson et al (2002) the largest obstacle for companies, prior to taking the next step is normally that they have limited knowledge. The completion of every step brings new knowledge to the company, which makes the next step in the establishment chain possible (ibid). Commitments to markets are usually performed in small increments, unless the company has large resources and/or if the market conditions are homogenous (Johanson & Vahlne, 1977). The knowledge gained from one market facilitates the establishment process in other markets, which explains why big international companies can systematically set up operations in different markets (Johanson et al, 2002). The theory of successive internationalisation has received some criticisms, among others by Reid (1983) in Johansson and Mattson (1988), who claims that this model is too general and deterministic. The choice of entry mode is context specific and can be explained by resource patterns and market opportunities (ibid). Johanson and Mattson (1988) believe that: “…the internationalisation model is less valid in situations in which both the market and the firm are highly internationalised.” Johanson & Mattson, 1988 (p.210) This remark illustrate that the internationalisation theory by Johanson and Vahlne (1977), is not relevant for this thesis since the companies included in the study already are highly internationalised. However, it provides a necessary understanding to what these companies have undergone in order to reach their current position. The theory will also serve as an aid in the final part of the
9
p. 23
~ 22 ~
thesis, where we will discuss how this ‘old’ theory can be adjusted to present conditions. 3.3.1 Internationalisation from a Network Perspective When companies today are organised as networks, the issue of entering a new market has two distinct features: entering a new network and bringing parts or the entire old supplier network into a new market. A search through literature regarding this phenomenon revealed extensive literature about entering a new network but scarce information about how to bring suppliers into a new market. The internationalisation process from a network perspective is portrayed in the literature from a rather general point of view. It is described by Forsgren and Johanson (1992), as a process when a company makes investments in relationships with customers, suppliers and competitors in a foreign market. The goals are to establish, defend or develop positions in foreign networks (ibid). A position in a network is established by historical actions and is continuously changing through the interaction process (Forsgren & Johanson, 1992). Easton (1992) explains that a change of position of one company will effect the positions of the surrounding firms and may even cause a cascade of changes throughout the entire network. Some firms that have achieved a preferred position may defend it with all means possible (ibid). A new company always signifies a threat to the actors in the network; especially large companies can expect resistance when they are trying to gain a new position (Håkansson et al, 1993). Small companies can be viewed as complements and will therefore not be met with the same resistance (ibid). Forsgren and Johanson (1992) assert it can be difficult for a newcomer to enter a network of stable relationships. When buying companies and their suppliers invest in their business relationships in terms of technical and commercial adaptation, it creates strong ties between the involved parties and for that reason, breaking a business relationship can entail high costs (Hallén, 1992). Although, according to Seyed-Mohamed and Bolte (1992), a company that controls a unique resource has an advantage and can strengthen its exiting relationships or initiate new relationships with others that seek access to that unique resource. According to Forsgren and Johanson (1992), the process of entering a foreign market is about trying to understand the network, timing activities regarding different relationships and responding to actions taken by actors in the network. The international strategy is therefore a matter of adapting to the existing business network structure rather than strategic decisions taken by top management (Forsgren & Johanson, 1992). Since networks usually are of a quite complex character, the most suitable way of
~ 23 ~
entering a foreign market is determined by the characteristics of the network and not by an individual firm (Seyed-Mohamed & Bolte, 1992). Johanson and Mattson (1988) suggest that entering a network is done by building relationships that are new to the company and its counterparts; either by breaking old relationships or by adding new to the already existing ones. The industrial network approach suggest that entering a foreign network can be achieved through: international extension, which means establishing new positions in relation to counterparts in national nets; penetration i.e. developing and increasing resource commitments in already established positions in foreign nets and international integration, where positions in different national nets are coordinated (Johanson & Mattson, 1988). Håkansson et al (1993) offer two alternative strategies of entering a network: successively or ‘big bang’. The former case implies starting in the peripheral of the network and then slowly becoming a more central actor. No actor moves in the network in the literary sense of the word; it is more of a slow restructuring process where one company’s position becomes more central. This strategy is time-consuming and could imply difficulties in a competitive environment. The latter strategy, the big bang, is about reaching a central position quickly by restructuring the network. This can be achieved by, for example, buying a central actor. The cons with this strategy are that it requires a unique product or a solid economic base to ensure the survival of the business activities. Another difficulty for the company is to attain the accurate information about the network before they are actively involved (Håkansson et al, 1993). The difficult task of gathering information about a foreign network is one of three critical issues a company must take into consideration when entering a network abroad (Axelsson & Johanson, 1992). The only way to obtain such information is, according to the authors, to interact with actors in the network. The other two critical issues, presented by Axelsson and Johansson (1992), are positioning and timing. Positioning is when resources are invested in business relationships and an actor thereby establishes a position in the network. Positions in, for example, domestic or third world markets can function as a stepping stone into a targeted market. Since networks are constantly changing through interactions between actors in the network, business opportunities will appear randomly. Timing is about quickly identifying opportunities and act on them. This last issue cannot be planned or prepared for in advance which further advocates the importance of presence in different networks. The closer an actor is to a network the more probable it is that the actor will be exposed to emerging business opportunities.
~ 24 ~
3.3.2 Emerging Markets There is no generally accepted definition of the term emerging market, although the term is frequently used in business literature (Rahman & Bhattacharyya, 2003). Less developed countries, newly industrialised and third world countries have all been referred to as emerging markets (ibid). Rahman and Bhattacharyya (2003) define an emerging market as: - A market that shows a promise of substantial economic growth in the future. - A recent opened economy for foreign direct investment, with a trade liberalisation process that will continue in the future. - A market with an institutional infrastructure to facilitate marketing transactions. Although, this infrastructure compared to one found in a developed country is less effective.
3.4 The Paradoxes
We have chosen to present the second part of our theoretical findings structured after three paradoxes: High vs. Low Involvement, Concentration vs. Dispersion and Control vs. Autonomy. The first paradox concerns the relationship with the suppliers, the second concerns the location of suppliers and the last one deals with the HQ’s control over production plants. These paradoxes were identified in our bachelor thesis, as issues companies must deal with when constructing a supplier network on a foreign market (in our case, the foreign market was China). In the thesis we found that the relationships between the customer and supplier influence the international actions of the companies. The theoretical findings divided this relationship in high and low involvement which portray two possible opposites of a relationship. It is more or less impossible to have a high and low involvement relationship with one supplier at the same time thus a company must always choose between these two. The most suitable way, according to us, is to present this choice as a paradox. Thereafter we examined the other factors that we had identified earlier, to see if these could be presented as paradoxes as well. The result was that we could add Concentration vs. Dispersion and Control vs. Autonomy to our High vs. Low Involvement paradox, ending up with three paradoxes. To facilitate the understanding of how the supplier structure is influenced by the paradoxes, we have constructed a model which easily portrays the supplier structure (see figure 3.2). Setting up production overseas implies using a mix of local suppliers and imports. The first step is to see how much the company
~ 25 ~
needs to import and how much they can buy from the local market. The degree of imports is depicted by the x-axis. The material and components that can be procured locally can originate from local domestic suppliers or foreign suppliers with their own production in the country. This puts local domestic suppliers in direct competition with foreign suppliers, indicating that these two factors are correlated. The more local suppliers a company uses, the less foreign suppliers are included in the final supplier network. The y-axis shows the degree of local suppliers where 100% local suppliers indicate 0 % foreign suppliers and vice versa. In the model, an example is given by the black dot. The position of the dot implies that 50% of the parts and components are imported. Of the remaining 50%, roughly 75% is bought from local domestic suppliers and 25% bought from foreign suppliers. This model will be used to portray how the paradoxes influence the supplier structure.
Local domestic suppliers
50 %
Foreign suppliers 50 %
Import
Figure 3.2 Supplier Network Structure
3.4.1 High vs. Low Involvement The business relationships a buying company has with its suppliers can range from close interpersonal contacts, where joint product development is performed, to keeping the supplier at arm’s length away, where a customer specification is the only contact (C.f. Christopher, 1998; Gadde & Håkansson, 2001). In our bachelor thesis we found that in the former case, the technology of the company, is the determining factor and the level of involvement with the suppliers is high, whilst in the latter case the volume aspect is more important and the level of involvement is kept to a minimum. In order for a buying company to develop and maintain effective supply strategies, they need to understand the economic consequences of their supplier relationships and be conscious of the possible
~ 26 ~
effects of changes in the level of involvement (Gadde & Håkansson, 2001). Gadde and Håkansson (2001) classify the supplier relationships in two categories: high- and low involvement. High involvement makes it possible for the buying firm to utilize the suppliers’ skills and capabilities in order to improve their own products and services. By working closely together, it is feasible to attain reduced costs by improving production processes and material flows. Christopher (1998), also discusses the benefits of working closely together with the suppliers, however the author names this type of relationship as ‘co-makership’. A close cooperation, according to Gadde and Håkansson (2001), entails significant costs in adaptation, co-ordination and interaction. As production processes become linked between companies the investments in the relationship, i.e. the created mutual dependency, can function as a barrier for competitors (Christopher, 1998). The cost of changing supplier increases as the companies invest more in their relationship (Hallén, 1992). Gadde and Håkansson (2001) continue their reasoning by saying that a high involvement relationship is only possible when there is a similar interest from the supplier, since this type of relationship imposes costs on the supplier as well. Therefore, the buying firm needs to motivate and encourage the supplier. A disadvantage with the high involvement relationship is that it is very time-consuming to develop. Buyer and seller need to know a lot about each other before the relationship will start; trust and commitment are essential. There is a tendency that companies are reducing their supply base; buying companies strive for long-term relationships with fewer suppliers (Christopher, 1998). According to the author, the future successful companies will be those who launch strategies based on closer relationships with key accounts. Gadde and Snehota (2000) support the idea of making partnerships with a few selected suppliers, since this type of relationship is resource intensive and can only be managed with a limited number of suppliers. The low involvement approach, described by Gadde and Håkansson (2001), is sometimes referred to as keeping the suppliers’ at arm’s length away, is about avoiding dependency on suppliers. Firstly, being dependent on only one supplier increases the uncertainty whether or not the supplier will be able to fulfil their responsibilities. Increasing the number of suppliers decreases this uncertainty. Secondly, by having a number of suppliers, a company can avoid being locked into a specific relationship. Two companies may develop in different directions and if they are closely connected this can create a problem. Thirdly, a company
~ 27 ~
with many suppliers can create competition among the suppliers with the purpose to get lower prices. When dealing with low involvement relationships little adaptation, co-ordination and interaction are needed, which gives this type of relationship the advantage of a low relationship handling cost10. On the other hand, switching suppliers can increase some of the costs, as well as making routinisation difficult. Dealing with many different suppliers may also raise the supply handling costs 11 . The low involvement strategy therefore gives a company the freedom to choose the ‘best’ supplier but it also puts some constraints on the type of product produced. A low involvement means standardised products and little adaptation possibilities. This type of relationship does not necessarily mean it is on a short term basis; a company can manage a low involvement relationship successfully on a long term basis. A high involvement relationship is appropriate when benefits can be gained by using the combined knowledge of the supplier and the buying company. For MNCs that are moving production into low cost countries, this should suggest favouring foreign suppliers or imports as shown by the dashed arrows in figure 3.3. A high involvement relationship takes time to develop and by using imports or foreign suppliers, the old relationship can continue in the new market. As long as the local domestic suppliers do not have disadvantages regarding knowledge and technical skills vis-à-vis the foreign suppliers, there is no reason that a MNC cannot start a high involvement relationship with domestic suppliers. However, in the initial phase of the internationalisation process this is unlikely, seeing that the high involvement relationship takes a long time to develop. The low involvement relationships are more suited for simpler parts and components and since it is driven foremost by cost, such a relationship can be established in a short period of time. Therefore the foreign suppliers and the local domestic suppliers can compete on more equal terms, which would suggest a movement along the black arrow in figure 3.3. The empirical findings in our previous bachelor thesis implied that local domestic suppliers often had a better cost structure than the foreign suppliers, which would increase the effect of the black arrow.
10
Relationship handling cost: cost dependent on the extent of the involvement with the supplier e.g. adaptation costs (Gadde & Håkansson, 2001) 11 Supply handling cost: structural costs for the whole purchasing organisation (ibid)
~ 28 ~
Local domestic suppliers Low involvement
50 % High involvement Foreign suppliers 50 % Figure 3.3 High and Low Involvement Effects Import
3.4.2 Concentration vs. Dispersion As mentioned in the introduction to this chapter, global companies now source on a worldwide basis to supply their global production. The strategy of a global company is explained by Christopher (1998) as trying to extend market presence and at the same time trying to achieve cost reductions through economies of scale. However, the task of supplying markets world wide through a few production bases, is a rather complex undertaking (ibid). Zsidisin et al (2000) claim that even though outsourcing has provided companies with a competitive advantage in the market place, it has also entailed an increase in the degree of exposure to risks throughout the pipeline Concentration or dispersion concerns, within the frame of our study, the location of the suppliers. Is it equally important to have the suppliers physically nearby, when communication across the globe has improved significantly? Despite the development of cheap and fast communications that has decreased the importance of geographic distance; it has not erased the significance of locations completely (Castells 1996; Kelly, 1999). MNCs will for the most part, keep their strategic command centres in, what they historically define, as their home nations (Castells, 1996). Certain phenomena, like for example sports events, will always be locked to a specific location (Kelly, 1999). In terms of business, meetings face to face will facilitate certain activities, in particular activities such as product development because of “…the nature of the interaction in the innovation process”12 (Castells, 1996). A purchasing company, according to Zsidisin et al (2000), must have confidence in the suppliers’ capacities to develop and stay efficient in their production processes. If both the
12
p. 390
~ 29 ~
buying company and the supplier are in the same geographic area, the buying company can easily visit the supplier to make sure they fulfil their requirements. Although, meetings in certain locations will limit the amount of possible connections that can be made, e.g. a person in a certain location can only interact with a restricted amount of people in the vicinity (Kelly, 1999). However, with the technological development, a great deal of the economic activities has moved into, what Kelly (1999) refers to as ‘space’. This space has, in contrast to a location, unlimited possibilities of potential connections. In space communication can connect nodes, dimensions, relationships and interactions in virtual networks in spite of their physical location. To come in contact with new suppliers is thus easier with this new technology. To sum up the thoughts of Castells (1996) and Kelly (1999), certain activities are bounded and necessary to be performed face-to-face in certain locations, while other activities are easily transferred to the ‘economic space’. Christopher (1998) claims that large corporations are often too concentrated on cost reductions to realize that the cost of longer pipelines may outweigh the savings gained from the cost reduction. Even if a supplier guarantees quality, the cargo can be damaged during transport (Zsidisin et al, 2000) and the longer the transportation the greater the risk of damage. Regarding the location of suppliers, Andersson (2000) claims that the type of offer, i.e. product or service and the complexity in the customer relationship, influence the international behaviour of the supplier. The more complex a relationship is, the more advantageous it is for the supplier to be near the customer, both geographically and physically. The theoretical findings stress, that suppliers that have production near their largest customers, as the best solution. However, in practice it is probably not possible to be physically close to all major customers. In figure 3.4, the concentration effect would decrease the amount of imports needed, while the dispersion effect would cause the opposite result.
~ 30 ~
Local domestic suppliers
50 % Dispersion Effect
Concentration Concentration Effect Effect
Foreign suppliers
Import 50 % Figure 3.4 Concentration and Dispersion Effects
3.4.3 Control vs. Autonomy Control vs. Autonomy concerns the independence of the production and assembly plants vis-à-vis the HQs. It is about organising the resources of the entire corporation across country borders. Some of the theories presented in this section are written from a logistic perspective. Even if logistics is not our main focus, it is a wide conception and since coordination of suppliers is a part of logistic issues, we have included these theoretical approaches in the thesis. When companies enlarge their supply chains internationally, they have to face the issue of structuring their global operations. Christopher (1998) discusses where in the organisation the decision-making responsibility should be placed. Conventional knowledge implies that this type of responsibility ought to be placed on the strategic business unit (SBU). Companies that have delegated power to the SBUs, usually also have a strong local management with an autonomous decision-making division in each country. This approach is ineffective when global strategies are required, however it may stimulate local initiatives. In order to reach a balance of global and local decision-making, Christopher (1998) points out that a number of general principles have emerged. • Global coordination is increasing in importance when companies only focus on their core competences13 and outsource the remaining activities. In order to manage and control the extensive supplier network, there is a need for local and central participation. Christopher’s (1998) opinion is that decisions regarding strategic issues should be taken at the HQ, while the
13
Christopher (1998) defines a core competence as a distinctive advantage
~ 31 ~
supervision and management of supplier actions ought to be managed locally. • In order to achieve trade-offs by moving divisions such as production and distributions across national boarders, companies need a central decisionmaking structure for logistics to succeed. Ridged local systems can impede the companies’ objective of global optimization. However, if successful, a firm can attain cost minimization and service maximization. • Since no markets are exactly the same, benefits can be gained by adapting marketing strategies to local characteristics. Especially customer service management 14 , where there is a possibility for tailoring according to individual customer needs. Even though customer service management is moving towards becoming more globally and centrally managed, a certain local adaptation will always be necessary. The opinion of Doz (1986), regarding the control or autonomy of subsidiaries located in foreign markets, is that decisions concerning the expansion or contraction of the network are of a rather difficult character. Those types of decisions can only be made by taking their effects on the entire network into consideration; hence they cannot be delegated to local management. The author continues by explaining that decisions regarding transnational investments are usually quite risky and uncertain. In order to prepare such a decision, several functions are often involved. Besides manufacturing and plant engineering specialists, divisions such as purchasing and finance need to be consulted. Specific choices are then taken by top management, which results in a centralized investment decision function in a majority of network enterprises.
14
Management of the entire order fulfilment process i.e. from order to delivery (Christopher, 1998)
~ 32 ~
Prahalad and Doz (1987) present a table, which offers an easy overview over factors that enhance and impede the HQ’s control over subsidiary operations. Factors Enhancing HQ’s Capability to Control Subsidiaries - Dependency of the subsidiary on resources of HQ: technology, management, export markets, finances - Share strategic vision and competitive strategy - Systems that recognise contributions to global strategy - Loyalty to MNC Factors Impeding HQ’s Capability to Control Subsidiaries - Historical evolution of HQ – subsidiary relationship: extent of autonomy of subsidiary - Host government regulations - Presence of joint venture partners - Loyalty to country, host government policies
Table 3.1 Control over Subsidiary Operations in a MNC Source: Prahalad & Doz (1987) p. 166
As mentioned earlier, when dealing with a global pipeline, it is crucial that the organisation finds the correct balance between central and local management (C.f. Christopher, 1998). In an organisation with a strong control from the HQ, the choice of suppliers in a foreign market should result in foreign suppliers or imports. In the initial phase of an establishment, the HQ ought to be more inclined to use already established and stable relationships, i.e. high involvement relationships, with foreign suppliers or continue importing. This is the quickest way of starting up production, since finding new suppliers and evaluate them is time-consuming. This movement is represented by the dashed arrows in figure 3.5. The more autonomy a production plant is given, the more local suppliers are likely to be possible to incorporate, seeing that the local plant has a better insight on the selection of available suppliers and the technological development on the local market.
~ 33 ~
Local domestic suppliers Autonomy Effect
50 % Control Effects Import 50 %
Foreign suppliers
Figure 3.5 Autonomy and Control Effects
~ 34 ~
4 Internationalisation Process in Practice – The Path of Three Companies
~
This chapter starts with a presentation of the interviewees and the companies and a short explanation of the tier-structure. Thereafter internationalisation aspects and the paradoxes will follow, repeating the structure from the previous chapter. In every section of this chapter, each company is presented separately in the following order: Ericsson, Scania and VTC.
4.1 Presentation of the Interviewees and the Companies
Ericsson Anna Ahnfalk Thomas Andersson Scania Volvo Truck Corporation Marianne Pettersson Olle Wengelin Alf Karlsson Lennart Carlsson Tryggve Kristenson Manager Electromechanics Group Function Sourcing Manager Electronic Manufacturing Services Group Function Sourcing Process Engineer Purchasing Purchasing Manager Supplier Improvement Coordinator International Manufacturing Director Business Strategy Manager
Table 4.1 Presentation of Interviewees
Global Presence Ericsson Scania Volvo Truck Corporation Presence: 140 countries Production: 3 countries Presence: 100 countries Production: 5 countries Presence: 130 countries Production: 12 countries
Outsourced activities15 85 % 50 % 75 %
Product Systems Trucks Trucks
Location of HQ Stockholm Södertälje Gothenburg
Table 4.2 Company Presentation
15
Percentage of the value of the final product added by suppliers
~ 35 ~
4.2 Tier Structure
Tier structure is mentioned repeatedly in the interviews. In order to fully comprehend the empirical material, a short explanation of this term is needed. The suppliers are organised in tier-structures (see fig 4.1 below). The tierstructure of one customer can contain numerous tier levels depending on the product. The total number of suppliers usually increases in each descending tier level.
Customer Tier1 Tier2 Tier3 Figure 4.1 Tier Structure
4.3 Internationalisation Process
The aim of this section is to present how the internationalisation process is conducted in the selected companies. Ericsson Ericsson has used different internationalisation strategies for different parts of their businesses. In China, for example, they have constructed a new supplier structure for some components from scratch; while for other areas, they asked the current suppliers to join them in China. There were a few suppliers that did not follow Ericsson, since it was more profitable to fly or ship the products from Sweden instead of starting up new production in China. There are circumstances when the supplier had seen business potential in new markets and recommended Ericsson to join them. Ericsson explains that the whole supply structure is much more mature now than compared to 10 years ago. Today most of the suppliers have extensive experience from moving into and operating in foreign markets. Some of the suppliers are more globally present and have more experience of new markets than Ericsson.
~ 36 ~
Ericsson can request suppliers to follow them into a new market, but the suppliers are not forced to do so. However, certain suppliers are obliged by contractual agreements to help a local supplier to start producing their product in the selected market, by providing the new local supplier with resources and competence. The motive for this type of contract is that it provides an easy solution for Ericsson, when the supplier’s interest and their own are divergent. Ericsson explained that the suppliers often are counting on being present on those markets Ericsson find attractive and are therefore willing to take the risk of ensuring to supply Ericsson wherever they may start production. There has been a change in Eriksson’s supplier strategies regarding the establishment of suppliers in foreign markets. Ericsson used to be more involved in the internationalisation process of the suppliers. Now, they want the decision to move production, to be taken by the suppliers themselves, i.e. the supplier must see the potential as well as search for other customers to supply on the new market. Although, if the supplier possesses a unique competence or is a small company, Ericsson might still get involved in the decision of moving production. Ericsson has recently decided to start up a new supply base in India. The reason is similar to that of China: huge market potential and extreme price pressure. The first step will be to start a facility where parts and components are being sent in order to be assembled (final assembly). Ericsson gained valuable experiences in China and they believe that the starting up process will be faster in India. The decision to enter India should be prompted by the suppliers’ own business strategy. The establisment process in China was made in two steps: The first step was to bring old suppliers to China, followed by the the second step which was to find local chinese suppliers. In India it might be possible to take “a short-cut” and focus on local Indian suppliers in an earlier stage, within areas where there is no or little technical risk involved. Regarding the suppliers in tier 1, Ericsson will probably use the same ones as in China, however they will focus on finding more local Indian suppliers in lower levels of the tier-structure.
~ 37 ~
Scania When entering a new market Scania focus on two issues: 1. How quickly do we want the establishment process to be performed? 2. Are there any new suppliers on this market that have a better position than the current ones? The overall guide to answering these two questions is the type of product that is going to be produced. The first thing Scania considers is the current supplier structure. Sometimes the current supply chain is not “mature” enough to move into a new country or it is not realistic to ask the suppliers to move with them into the new market. Scania has several examples where they have “made” suppliers follow them into new markets. They see it as a negotiation process where there is: “ …threats and enticements by turns…”16 (Olle Wengelin, Scania) Basically it ends up with a “take it or leave it” offer, where the supplier probably views it as a threat, while Scania sees it more as a business opportunity offer. Since there is always a possibility to import articles and components in the beginning of an establishment, the second question does not need to be fully investigated before the production plant is up and running. Scania tries to focus on international suppliers and has therefore a well developed net of global suppliers. Due to this reason, an entry into a new market will not have any major effect on their overall supplier structure. The global presence of the suppliers makes it easy for them to start delivering into new markets. Starting a new production plant does not entail a large effort in finding new suppliers on the new market. Often there is a basic industry already established in the country, which can be used for basic parts and components. Scania’s most recent establishment was a bus production plant in Poland. The internationalisation process has been facilitated by the increased global presence of suppliers; however, nowadays there are more complex systems that need to be moved.
16
Own translation
~ 38 ~
Volvo Truck Corporation The reasons for establishing production abroad are the same today as 20 years ago: business potential. When business potential is identified in a country, the next step is to decide in what location the production facility would be most profitable. The choice is based on several things such as: logistics issues, the availability of competent personnel and the benefits that the authorities might offer foreign investors. The procedure of setting up a new factory is not itself complicated and within that area VTC has many years of experience. However, the problems vary depending on country conditions and governmental rules. The purpose behind the location of production facilities is based on two main factors: - Strategic reasons - “Must reasons” Strategic establishments are made in those parts of the world where there is a projected sustainable growth and where there is a potential for producing and selling large volumes. The closeness to a specific market is another reason for such an establishment. A strategic establishment is not only starting production and supplying a new market; in those locations VTC will build up an entire organisation, i.e. VTC will have functions such as procurement and an ITdivision locally. These kinds of establishments do not have the requirement to make an immediate profit, since it is a large-scale and long-term investment. These kinds of investments also usually entail high risks. Other investments, such as a completely knocked down (CKD) production facilities, are expected to generate profit within a year. CKD-production implies that more or less the entire vehicle is sent in parts as a package from Europe to an assembly facility abroad. The risks are lower since this way of working requires less investments and there is a possibility for a quick shut down of the production if, for example, market conditions changes. “Must reasons” to enter a new market is when VTC is forced by trade barriers to start production in a country, in order to be able to sell on that market. Such a barrier might be high tariffs for importing a complete vehicle or the demand for local content17. Suppliers that do not follow VTC with production into new markets are not necessarily replaced if they can deliver to the new factory at a reasonable price. This usually concerns smaller production facilities in less important markets.
17
Local content demand means that a certain percentage of the parts and components of a truck must originate from the local market i.e. produced within the country.
~ 39 ~
However, concerning strategic establishments, there is a demand for global suppliers to be present. VTC’s opinion is that if one of their global suppliers is not already present in one of their strategic markets, they should follow VTC into this market, trusting VTC’s assessment of business opportunities. So far, the suppliers themselves have seen the value of moving production near VTC and therefore it has not yet been a problem. In general, global suppliers are not in direct competition with local suppliers. However occasionally, for example in a market such as India where there is a demand for local content, small local suppliers can be used on the expense of a global European supplier. When entering a new market, the volumes are usually quite small and VTC can initially supply the new market by importing CKD-kits. Certain factors, such as cost positioning, high import tariffs or a local content demand from the host government, forces VTC to start buying locally soon after an establishment. For strategic establishments, having suppliers nearby is more important, since this type of establishment represents a large long-term investment with the goal of supplying either a large market or several markets. As mentioned above, there is more or less a requirement for VTC’s global suppliers to be in the geographic proximity of a strategic establishment. The locations of suppliers have not yet caused any problems for VTC. A CKD-assembly plant can, to a large extent, rely solely on imports and are therefore not dependent on suppliers nearby. China is VTC’s most recent strategic establishment. They started up with a CKD-production facility but at the same time they began the construction of the supplier network, building relationships with authorities, developing the procurement organisation etc. In South America, this procedure took about 10 years before it had reached its “full” potential. As for Asia, the next phase will be to start sourcing materials and finished products between the countries in the geographic area. Currently, it is only possible to source between the ten countries that are members of the free trade association, ASEAN (Association of Southeast Asian Nations)18. Today there is a flow of completely built up (CBU) units from Europe to Asia. However, VTC’s belief is that due to increased volumes and better cost-structures in Asia, this flow will turn around in the opposite direction, i.e. a flow from Asia to Europe, within a not too distant future. The initial flow might be components and material but will soon be followed by complete products.
18
The members are: Brunei, Burma (Myanmar), Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, Cambodia, Laos (source: Keegan, W & Green, M., 2000)
~ 40 ~
4.4 The Paradoxes
4.4.1 High vs. Low Involvement All three companies produce rather complicated products. Certain parts and components require the suppliers to have a high level of technological knowhow, while some are simple products that the buying companies order in large volumes. This paradox basically, as explained in the previous chapter, deals with the relationship a buying company has with its suppliers. The volume side represents a low involvement relationship, where the contacts usually are performed with an arm’s length distance. Regarding the more technology intensive parts, more efforts are put into the relationship, thus resulting in a high involvement from both sides. Ericsson Ericsson has roughly 100 suppliers in tier 1 and in total about 500. Approximately 85% of the produced value is deriving from the suppliers. In tier 1 there are 20 main suppliers that represent 90% of the value, the other 80 suppliers stand for the remaining 10%. These 80 suppliers produce products such as cables, screws, nuts and installation kits. Ericsson works mainly with suppliers in tier 1 and 2. Regarding standardised products and where there is sufficient competition among suppliers, there is less need for Ericsson to be involved in lower tier-levels. However, sometimes there are reasons such as severe competition and design issues to get involved in tier 3 as well, especially when the products are “Ericsson unique”. During the development stage of new products, there are some areas where the company can only work with a few selected suppliers, which can lead to a weak competition. Development performed in cooperation with suppliers that also supply competitors of Ericsson, usually only includes less advanced products. Today Ericsson mainly uses large global suppliers. The company started with rather small and “family owned” suppliers but during the years, many of these have been bought or merged with other suppliers, resulting in the global players that constitutes the current supplier structure. Ericsson’s requirements on their suppliers are for example: quality, environmental thinking, best price structure, flexibility, long-term commitment and “capable and competent”. Being “capable and competent” implies being able to participate in development projects as well as managing their sub-suppliers.
~ 41 ~
The relationship with the suppliers is usually on long-term basis and most of the suppliers in tier 1 are the same ones as five years ago. However, due to fierce competition, there is a strong focus on cost and the total cost is always the determining factor when choosing a supplier. Usually, the same supplier is used during the whole life-cycle of a product, since it is often too expensive to switch and because there is a risk involved in terms of quality assurance and supply. Ericsson has insight into the affairs of the majority of their suppliers and in most cases Ericsson negotiates prices and contracts with their suppliers’ subsuppliers, i.e. suppliers in tier 2. The result is that more than 80% of the product price is controlled directly by Ericsson. For the remaining share of the total price, there usually exists a cost model for how the price should be built up, normally provided by Ericsson. There is a limited number of suppliers that are irreplaceable due to design issues. However, these suppliers represent only a small value of the final product. The reason why these suppliers are still used, is because the design change needed, to be able to use an alternative source would cost more than paying the higher price that the current supplier is asking. Ericsson is focusing on their core business and extensive vertical integration is not a strategy applied by Ericsson since the outsourcing process of manufacturing is more or less finished. Today, Ericsson does not own any of their suppliers or sub-suppliers and the ambition is to decrease the total number of suppliers. However, within certain areas the number has increased in order to intensify competition or take advantage of new knowledge. Scania Scania has roughly 550 suppliers in tier 1; they have no exact estimation of how many suppliers they have in tier 2. In the past they owned some of their suppliers, however, this number has decreased during recent years. The suppliers add about 50% of the produced value and the goal is to focus the efforts towards the suppliers in tier 1. If possible, they try to avoid working with suppliers further down the tier-structure. Although, certain circumstances force Scania to get involved with the suppliers in tier 2 and lower, e.g. when an article or component has a significant effect on quality and therefore also could affect the perceived image of Scania. In the interview, Scania stressed the fact that the total cost always decides what supplier to use and where to produce. However, when asked about guidelines for selecting suppliers, cost appears as the fourth criterion.
~ 42 ~
1. Safety 2. Quality 3. Delivery
4. Cost 5. Time to market
After selecting a supplier, Scania uses a model in order to classify the relationship with the supplier.
Involvement
High Excellence in manufacturing Mature Labour Catalogue Low Low Figure 4.2 Scania's Supplier Categories Source: Scania Development
Joint Venture
Value added by supplier High
The demands of the suppliers increase successively, with little demand on the Catalogue suppliers to complicated requirements on the Joint Venture (JV) suppliers. The Catalogue supplier relationship, for example, is short and there is no requirement for technological leadership or global presence. For the Development or the JV-suppliers, the situation is the opposite, where global presence is mandatory and leadership in technology is required. These relationships are on a long-term basis with a recommended length of 3-5 years. The suppliers in the Catalogue ‘bubble’ are easy to switch, while a change of supplier in the Development and JV-bubble entails more difficulties. It is important for Scania to find the best supplier within each bubble and they work actively to encourage the suppliers to improve. However, Scania does not want the suppliers to switch bubbles; the goal is not, for example, to make a Labour supplier become a Development supplier. Scania wants the suppliers to stay and improve within their bubble; this movement is portrayed by the arrows in model 4.1.
~ 43 ~
High 80 % of total volume 20 % of total volume
Low
Impact on average material cost
Leverage Products Various suppliers. Represents a relatively large share of the average end product
Strategic Products A close and long term cooperation to obtain significant improvements in the areas of product development, quality and cost reduction is necessary. Will result in one supplier available Bottleneck products One supplier available. Represents a minor share of the cost of the average end product. High
Routine products Various suppliers. Represents a minor share of cost of the average end product.
Low
Commercial risk Figure 4.3 Scania's Matrix for Procurement Source: Scania
The model concerns tier 1 suppliers and Scania has certain recommendations depending on where in the model a supplier is positioned. When dealing with suppliers, Scania estimates the commercial risk. If it is possible to change a supplier within 2 years then the commercial risk is low, if it is impossible to switch within that timeframe the commercial risk is high. Scania strives for long relationships with their suppliers in order to reduce risk. When looking at a relationship with a supplier, Scania takes the annual volume of the article or component and multiply it with the price, which gives them a volume value. Then they place the supplier in the following matrix. The goal is to have several suppliers for each part or component in order to have the possibility to switch supplier if necessary. If a supplier ends up in the bottleneck position, Scania will work actively to try to either change the supplier or change the construction of the part or component. Scania will however always have their guidelines in mind and therefore they will always give priority to safety and quality before cost. Volvo Truck Corporation VTC has about 1 500 suppliers in Tier 1, an exact figure is difficult to present since the number of suppliers varies depending on the product. Approximately 75% of the produced value is outsourced. The selection of suppliers follows
~ 44 ~
certain criteria such as global presence and leadership in technology. The latter requirement is due to high development costs. By outsourcing some of the development of components, the cost is transferred from VTC to the suppliers. Since the suppliers normally have many customers demanding similar products they can divide the development cost on larger volumes. The length of the relationship is of importance and priority is given to suppliers with a long history of business with VTC. There is a strong environmental focus within VTC and suppliers that can fulfil VTC’s environmental demands are preferred. Another criterion is that the suppliers has to have other customers besides VTC, in order to spread the risks. The current trend is moving towards using system-suppliers to a larger extent, which implies using fewer suppliers who represent a larger value. The number of suppliers varies in the different product segments. In some areas where the products are more standardized, there is quite a large number of suppliers to choose between. In those segments the relationships are driven by cost and changing suppliers is only done if the cost differences are significant. Regarding certain more complex components there might only be one or a few suppliers available. In those cases, performance requirements are given priority and the supplier that can deliver the best performance is chosen and cost issues become secondary. Well-established long-term relationships are valuable since the automotive industry is a rather mature business and competition pushes the industry forward. VTC has a quite fixed supplier structure and changing suppliers is often not preferable. They favour ‘old’ suppliers, which are constantly being encouraged to improve their performance. Due to the competitive environment, the development procedure is today shorter, which pushes the cooperation to start already in the early development stage. The collaborations are therefore becoming more intense, and the relationships between VTC and their suppliers are, to a large extent changing, from being between VTC purchaser and the supplier, to being between VTC designer and supplier. A close cooperation with the suppliers entails the possibility to further investigate what sub-suppliers they use and having that knowledge, VTC can try to find further ways to cut costs. Previously, VTC owned some of their suppliers, i.e. some components were produced within the corporation. Nowadays, VTC is intensively working towards outsourcing parts of the business due to cost reasons. Buying components externally renders possible better price proposals and gives VTC the opportunity to choose the supplier with the best offer. However, essential
~ 45 ~
components will always be produced by VTC, in order to secure quality and take advantage of the knowledge within the corporation. 4.4.2 Concentration vs. Dispersion Concentration or dispersion concerns the location of the suppliers. Is it equally important to have the suppliers physically nearby, when communication across the globe has improved significantly? Ericsson Ericsson has production facilities in Sweden, China and Brazil and from these three productions bases they supply the entire world. However, Brazil is somewhat of an exception. Import tariffs and taxes forces Ericsson to produce in Brazil in order to supply that specific market. As of today it is not profitable to export from Brazil to other countries, for example, in South America. These countries are being provided with products from factories in Sweden or China. Ericsson is mainly trying to use regional supply chains, since they produce large volumes and are dependent on short lead-times. For example, the factories in Sweden are mainly using suppliers located in western or Eastern Europe. Trade barriers and governmental demands were usually determining where production bases were located, e.g. both the decision to enter Brazil and China were based on governmental demands. However, today manufacturing in China and Eastern Europe is mainly based on low cost advantages. For complex products Ericsson is mainly working with global suppliers even in tier 2 and tier 3. On other occasions, where the products is less complicated global suppliers in tier 1 are finding their own local suppliers in lower levels of the tier-structure, in order to get a better cost-structure. Ericsson encourages this, since it renders possible including local suppliers without involving Ericsson in that process. Scania Scania has a world-wide web of suppliers and they work actively to focus on suppliers that can supply on a worldwide basis. When choosing suppliers, the total cost is the determining factor. Sometimes transportation costs are significant, which favours suppliers nearby. In other occasions, a large cost reduction in price renders possible transportation over longer distances. Scania requires a global presence; the minimum requirement is usually for a supplier to have production in Europe and South America, since Scania’s production bases
~ 46 ~
are found in those locations. Only in certain circumstances, when there is a requirement for local presence or if it is “unnatural” to ship certain parts and components, Scania will choose local suppliers. Another reason for evading their supply strategy of favouring global suppliers is when it is impossible to mix the parts and components of certain suppliers. The type of order will decide where the production takes place. A truck will be manufactured where it is most convenient and cost efficient. This however entails that the customers sometimes have to endure long lead times. Volvo Truck Corporation Seeing that Sweden has a rather small industry compared to that of, for example Germany, VTC started at an early stage to use global suppliers, since they were the only ones available. The majority of VTC’s suppliers are European, with production in Europe. Recently, however, there has been a trend for the suppliers to start setting up production in Asia. Given that VTC produces large volumes, they need suppliers that are able to meet the required quantities but also to be able to take the development costs. Only simple details, such as sheet metal can be bought by local smaller suppliers. Whether or not a supplier is located nearby the production facilities is not always important, as long as they can deliver on time and to a reasonable cost. Lead-time and flexibility determine how close the suppliers need to be. This usually implies that the supplier must have production bases situated at several locations in order to meet the requirements. 4.4.3 Control vs. Autonomy Control vs. Autonomy concerns the independence of the productions and assembly plants vis-à-vis the HQs, i.e. where decisions are taken. Ericsson Ericsson is divided into five different business units (BU), where every unit, centrally managed, is responsible for choosing suppliers for the entire unit. There are also a division called the International Purchasing Offices located in China, USA and Japan, helping the BUs to find local suppliers. They are, as explained by Ericsson, “involved” but not “leading” the process. The BUs manage all strategic and tactical purchases centrally and are in charge of negotiations and contract formulations. Each BU has compiled their individual “preferred supply list” for the whole world. Suppliers from the list are to be used
~ 47 ~
first and foremost but if new suppliers are to be used, the process of evaluation is quite extensive and decision making are involving high positioned executives. There is also an additional unit, Group Function Sourcing, managing and coordinating across the BUs. Scania Scania has a hierarchical structure regarding the selection of suppliers and all decisions are taken by the HQ in Södertälje. They prefer this type of organisation, since they claim that they at the HQ see the “whole picture” and they think in “Scania-terms”. Larger decisions are taken by the procurement office in Södertälje, whereas smaller strategic decisions can be made by the Global Procurement Council (GPC), which has representatives from both the production division and construction division. If it is a decision regarding suppliers in, for example South America, representatives from South America will be present. The final decision, however, is always made at the HQ. Allowing more decisions to be taken by production centres will dissolve the “Scania thinking” and too much focus will be put on a specific production plant. It is important that the choice of, for example, a certain supplier is good for the entire organisation and not just a specific plant. If all decisions regarding the choice of suppliers were taken by the specific production plants, too much time and money would be spent on quality evaluation and negotiations with suppliers. Scania has one product that they deliver on a worldwide basis and it is crucial that this product is exactly the same everywhere. Having many local suppliers implies a major effort in controlling and ensuring that all parts and components are equivalent everywhere. Scania do acknowledge that by taking all the decisions at the HQ, some opportunities in local markets may be lost but they stress that in the end, thinking in terms of the entire organisation is most efficient. Scania is in fact moving towards an even more controlled procurement management and will move even more of the decisions upwards in the hierarchy.
~ 48 ~
Volvo Truck Corporation VTC is formed in a matrix organisation, which means that there is a global structure with global directors and local structures with local directors. For the procurement department, VTC has strategically located six purchasing divisions spread around the globe. Even though the purchasers are located in different countries, they are buying units for the entire organisation. The decision of what suppliers to utilize is taken by the Volvo Global Sourcing Committee, which consist of a number of directors from divisions all over the world. Traditionally, the purchasing officer had large influence on the choice of suppliers; today however, the responsibility has moved upwards in the hierarchy and the role of the purchaser officer is changing into that of a coordinator with a preparatory function. When adding a new supplier, each supplier is evaluated according to a standard procedure, where they have to fulfil several requirements. Those that fulfil the criteria are presented to the Global Sourcing Committee which, as previously mentioned, takes the final decision. The supplier selection has become more bureaucratic and time-consuming, but on the other hand, it has also become more structured and less influenced by personal opinions of, for example, the purchasing officers. The procedure also implies that the different suppliers are more easily compared.
~ 49 ~
5 Reaching the End of the Path
~
Our purpose was to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company, when entering a new market. In order to fulfil our purpose, we will discuss the empirical findings in relation to the theoretical material with the objective of answering the research questions in the final part of the thesis. The structure of this chapter is the same as the one found in chapter three, i.e. starting with network and internationalisation aspects and concluding with the paradoxes.
5.1 Network aspects
When the supply chain has been transformed into a network, where cooperation is more beneficial than competition, Christopher (1998) stress that there is no point in transferring cost upstream or downstream, since all costs will make its way to the end user anyway. Although VTC’s view is that, seeing that the suppliers normally have many customers requesting similar products, they can divide the development cost on larger volumes. Therefore VTC can transfer some of the costs to the suppliers, without affecting the final price. This can of course only be valid for standardised components, since this strategy only is successful if the suppliers have many customers that demand the same component. Products that are in some way adapted to a specific customer cannot, according to our view, be part of this strategy. If there is only one customer for a product, the development cost cannot be reduced, thus the result would be a transfer of costs within the same network, which according to the theories is ineffective. If all costs are transferred to the end user, it is essential to strive for cost minimization. Our empirical results show that the companies do not own any or only a few of their suppliers. Our thoughts regarding this is that by owning a supplier, the cost of their component is not subjected to competitive forces (the MNC ought to utilize the ‘in-house’ supplier, otherwise owning the supplier is useless) resulting in a higher price, thus increasing the total cost of the complete product. Managing the supply chain, according to Christopher (1998), first requires the need for a higher level of joint strategy development. With our selected companies in mind, we find it difficult to believe that there is a high level of
~ 50 ~
joint strategy development, since they all have a large number of suppliers. Ericsson, that has the smallest number of suppliers, has for example 100 suppliers in tier 1. Even if all of the interviewed companies press that they cooperate as much as possible, our belief is, that the buying companies ultimately have the power, since they decide from whom they are going to buy. Especially in our case, seeing that the interviewed companies represents original equipment manufacturers (OEM). There is a possibility to see the selection of markets as a somewhat joint strategy development between the suppliers and the buying companies. In the situations where the MNCs are first to establish on a new market, they try to make their suppliers see the benefits of an establishment. The empirical findings also show that this can happen the other way around, i.e. a supplier can be first in on a market and then recommend the MNC to join. This behaviour shows, in our opinion, that there is an established trust between the MNCs and their suppliers. An establishment in a foreign market represents a large investment and the fact that the companies trust each others’ recommendations, supports our thoughts. Successful supply chain management is about obtaining profits for all parties involved and naturally there are benefits to gain if both the supplier and the MNC are established on the same markets. Secondly, there is a requirement for the members of the network to stop thinking in terms of self-interest and to take on a more holistic approach (Christopher, 1998). When the organisational form of companies have transformed into networks, placing the competition between supply chains instead of between companies, it is crucial that the network is optimised. If this is not achieved, the network will not be competitive enough, which is negative to all parties involved. On those occasions when there is more than one supplier available for a product, the competition favours the network. Competition pushes the prices downwards, which in the end is favourable for the end customer as well as making the entire network more competitive. When there is a few or even only one supplier available, they can concentrate more on their self-interest, i.e. keep a high price level, since they are not replaceable. This can be exemplified with Ericsson and the fact that they, in one case, only have one supplier for a certain component. A situation they dislike, since they are more or less required to comply with the demands of this supplier. In the future, Ericsson strives to avoid this, given that this behaviour does not favour the network and makes the entire supply chain less competitive. Thirdly, a transparency and visibility of relevant information throughout the network is essential, in order to make the network function to its full potential. Ericsson, for example, has insight into the affairs of the majority of their suppliers and in most cases Ericsson negotiates prices and contracts with their
~ 51 ~
suppliers’ sub-suppliers. In this case our perspective is rather limited, since we only have interviewed OEMs and from their point of view, they naturally have both insight and control throughout the network. Whether the other parties involved in the network easily can obtain relevant information, is not something our research can answer. However, our belief is that an OEM might have to guard certain information concerning their product or technology, seeing there is a possibility that some of their suppliers supply their competitors as well. In fear of company specific information or technology specifications ending up in the hands of a competitor, the MNCs might choose to retain certain information, which could prevent the network to reach its full potential.
5.2 The Internationalisation Process Today
The motives for starting production abroad today are the same as 20 years ago; the search for business opportunities or avoiding trade barriers such as high import tariffs. The theoretical explanations of why companies expand their operations abroad, i.e. resource seeker, market seeker and minimising the risk, are thus still valid and there is no need for significant modifications to the current business climate. However, there can be a minor modification to minimizing the risks. The current theory regarding this subject proposes an invitation from a customer to a supplier when establishing on a new market. Our suggested modification is that both suppliers and customers can recommend each other to enter a new market. The internationalisation process is, as expressed by the interviewed companies, easier today since they have more knowledge about operating in foreign markets. This is in accordance with the internationalisation theories of Johansson and Vahlne (1977), where they explain that when companies gain more knowledge and experience from foreign trade, the internationalisation process is facilitated. Ericsson stated that they will use their knowledge gained from their experiences in China when entering India. This proves that even though Ericsson has several year of experience from international operations, they are still learning. Therefore, the model presented by Johansson and Vahlne (1977), is still somewhat valid for companies like Ericsson. Even though the interviewed MNCs have extensive knowledge about operating abroad, there are of course always country specific circumstances which prevent an entry on a new market to be completely routinised. All of the interviewed companies expressed that the construction of a production plant on a new market is a rather ‘simple’ project. In the initial phase, all companies import their products in complete kits. Importing kits makes it feasible to start production without the proper suppliers established in the country. Since all of the interviewed companies’ suppliers to a large extent are
~ 52 ~
global, mainly in tier 1, these suppliers can, if they are not already present on the market, easily supply them from abroad. In many countries there is also a basic industry already established, that the companies can use for simple components, which results in importing only advanced systems and components. Depending on the purpose of entering a market, importing in kits continue if market presence is the only objective. If it is a strategic objective on the other hand, the search for suppliers starts. In many cases the suppliers are already there or they follow, since they too see the business opportunities. Ericsson has, for example, stipulated in their contracts that suppliers need to follow or help find new suppliers in a new market. A new plant will, according to the empirical results, not affect the supplier structure of the MNCs as a whole. New suppliers will be chosen if it is more convenient or if there is some type of governmental requirement or trade barrier. These suppliers will probably fit the current structure, given that they will be thoroughly evaluated. Our perception is that since all the companies are concerned about quality, these new suppliers can be seen as a complement to the entire supplier structure. No company expressed any problems in finding or bringing in suppliers to the new market. The establishment chain presented by Johansson and Vahlne (1977) could therefore be modified to fit this type of organisation in the current business climate. The first step would be the decision to enter a new market, a decision based on their own initiative or a supplier’s recommendation. The second step would be setting up a production plant followed by importing in complete kits. The last step depends on the strategic objective of the establishment, either importing continues or a supplier network would start to be established. These two alternatives can be related to the strategies of entering a network, offered by Håkansson et al (1993), i.e. successively or ‘big bang’. The successive entry is the one where the MNC continue importing in kits. In these occasions the MNC does not have the objective of buying as much as possible from the local market and are content with importing almost everything. This can be seen as peripheral activities in a network and as the MNC’s market share increases, they slowly become a more central actor. The ‘big bang’ entry is when the MNC enters a new market and build up an entire organisation, which is only possible for a company with a solid economic base. Since the interviewed companies are large corporations, their presence on a market will most likely affect many companies, thus causing a restructuring of the present network. The resources and capacity of the MNCs are likely to give them a central position rather quickly. From the industrial network approach, the interviewed companies have utilised the strategy called international extension, when they have established new positions in foreign networks. The international integration, i.e. increasing the coordination between positions in different national networks, can be
~ 53 ~
exemplified by the companies’ efforts of further structuring the purchasing activities and placing more control at the HQ. Forsgren and Johanson (1992) stress that it can be difficult for a newcomer to enter a network of stable relationships. According to Håkansson et al (1993), a new company, especially a large one, always signifies a threat to the actors in the network. However, according to Seyed-Mohamed and Bolte (1992), a company that controls a unique resource has an advantage in this situation. For the companies included in our research, this is especially true. A MNC should be welcomed in an emerging market, both from the host government and the domestic companies, since they represent large investments, provide skills and technical knowledge and offer employment opportunities. MNCs do of course also represent a strong threat to domestic companies and foreign MNCs already established on the market. However, the foreign MNCs established in emerging markets might welcome other MNCs, even if they are within the same line of business. If a new MNC bring a few of their suppliers to the market, the already established MNCs could benefit from the enlarged number of available suppliers. Aside from the benefits the MNCs can gain by controlling unique resources when entering an emerging market, they can also benefit from the fact that the market is recently opened for FDI and that domestic players are willing to start business relationships with foreign corporations, thus making the ties in the network weak. The three critical issues, presented by Axelsson and Johansson (1992), concerning what a company must consider when entering a new market, i.e. gathering information, positioning and timing will, according to us, have the following effects. Gathering information could possibly be facilitated if the MNCs already have suppliers in the chosen market. The fact that all of the interviewed companies have large resources both in terms of money and knowledge, the first critical issue should not cause major problems. Positioning will in this sense only favour the companies, since they already are present in over 100 countries. Timing is about identifying business opportunities and act quickly. Even though all of the interviewed companies have gathered a large amount of business intelligence over the years timing cannot, according the theoretical findings, be taught. Being present in many countries, however, increases the chance of being exposed to business opportunities, which is a criterion that is certainly fulfilled by our chosen MNCs. The organisational form, i.e. the network configuration, implies, as seen in the first chapter, a greater flexibility to respond to emerging market opportunities. Thus, this last issue, timing, might be facilitated due to the network form of large MNCs. Not only can the companies respond quickly to an opportunity because of the flexibility
~ 54 ~
provided by the network, their spread is also extended by the network. When companies worked independently they were only able to seize a limited amount of opportunities. However, the network form gives the companies an extended reach and it is probable that they, as a network, will be exposed to more emerging business opportunities. This could be the reason why the network form of companies has become so utilized, seeing that it is the most suited organisational form for today’s commercial environment.
5.3 The Paradoxes
When the competition is between value chains, the structure of these chains is increasing in strategic importance. How did our paradoxes stand the empirical testing? 5.3.1 High vs. Low Involvement All three companies that were interviewed are mainly focusing on long-term collaboration with suppliers in tier 1. Many of these suppliers are system suppliers and since these systems often represent large parts of the final product, a close cooperation is required in order to achieve the required standard and quality. This would, according to the theoretical findings, indicate high involvement. Our perception from our bachelor thesis was that a majority of the business relationships, found in tier 1, were high involvement. In a high involvement relationship, resources are invested and adaptation and coordination in production processes are required. This entails large costs in terms of lost investments for the involved companies, if they want to end the business relationship. Most of Ericsson’s suppliers in tier 1, are the same ones used five years ago, which according to Ericsson, signifies their long-term commitment. Both Ericsson and Scania term their supplier structure as mature, which we interpret as being a structure that has developed during several years and has a rather stable composition. This further advocates our belief that a majority of high involvement relationships are found in tier 1. Even if Ericsson mainly works with the suppliers in tier 1, they do engage with tier 2 suppliers, when the products are “Ericsson unique” and therefore requires closer cooperation. As described in chapter three, high involvement is necessary when the products are complicated or, as in Ericsson’s case, ‘unique’. If the companies work closely together with their suppliers, they can utilize the suppliers’ skills and capabilities in order to improve their own products and services. ‘Co-makership’ is a term used in order to accentuate the importance of this type of relationship. We can therefore note that there are high involvement
~ 55 ~
activities in tier 2 as well. Scania claimed that in order to assure quality they would go down as far as needed in the tier structure, which could indicate high involvement even further down the tier structure. Scania’s model 4.1 also shows that low involvement suppliers are present in tier 1. This implies that being a tier 1 supplier does not necessarily mean high involvement. Gadde and Snehota (2000) assert that a company can have a close relationship with few selected suppliers, since this type of relationship is resource intensive and can only be managed with a limited number of suppliers. This would explain the presence of low involvement suppliers in tier 1 and also how the companies are able to handle a large number of suppliers in tier 1. All three companies are in businesses where low cost is a determinant factor for success and they try as much as possible to work closely together with their suppliers, in order to attain reduced costs by, for example, improving production processes and material flows. The interviewed companies are to a large extent, interested in not only how the suppliers work but also their suppliers’ involvement with their sub-suppliers. The purpose is to find cost reductions for the supplier and consequently for themselves. The discussions during the interviews were mainly focusing on cost issues, when dealing with the choice of suppliers. However, when looking at the guidelines for selecting suppliers received from Scania, for example, they pointed in another direction. Cost is the fourth consideration following safety, quality and delivery. Ericsson also has guidelines in which cost is surpassed by, for example, quality and environmental thinking. We believe that due to fierce competition between suppliers and high requirements from their customers, issues such as safety, quality and delivery are basic criteria that need to be fulfilled by the suppliers, in order to even be considered as a possible supplier. Cost, however, is something that can be improved through collaboration between supplier and customer and through development in production processes. Therefore, cost ends up as the most determining factor when choosing suppliers. Regarding more complex products, however, VTC states that when there is only a few suppliers available, cost issues are secondary and performance requirements becomes determining. Outsourcing represents the “new” network thinking, i.e. outsourcing to suppliers creates the linkages in the network. Our opinion is that, in these networks, the high involvement relationships signify strong ties thus resulting in a strong network. When resources are invested and production processes are adapted, the cost of breaking up a business relationship with a supplier is increased, thus creating barriers for outside parties. Buying companies can be reluctant to break certain relationships because of sunk costs. The low involvement relationships, on the other hand, where price determines which supplier to use, symbolizes
~ 56 ~
weak ties. Switching suppliers, for example, is easy in a weak network, since no or little resources have been invested in the relationships. When presenting the model to the companies they all agreed to the accuracy of the content of the model but explained that they did not think specifically in those terms in an internationalisation situation. However the model, according to the companies, depicted perfectly the achieved result.
Local domestic suppliers Low involvement
50 % High involvement Foreign suppliers Import 50 % Figure 5.1 High and Low Involvement Effects
5.3.2 Concentration vs. Dispersion The location of the suppliers has not yet affected any of the interviewed companies’ internationalisation processes. This can in part be explained by the strong focus each company has on global suppliers. The majority of the interviewed companies’ high involvement suppliers are today large corporations active on a global basis. When starting up production on a new market, the companies are often dependent on having these high involvement suppliers nearby, since they often supply complete systems. The relationships with these suppliers have been developed during a long period of time and those suppliers are not easily replaceable. None of the interviewed companies have, so far, encountered any problems concerning the location of the suppliers, since there is usually a common interest for both parties to be active on the new market. Seeing that these suppliers can supply on a world wide basis, it does not matter where in the world these MNCs decide to start production. Ericsson has even created a safety net by stipulating in some of their contracts that the supplier must either follow them into a new market or help them find new suppliers
~ 57 ~
The theoretical findings points out that the more complex products, the closer the suppliers want to be to their customers. Another factor that advocates the suppliers’ presence close to their customer is that business meetings face to face will facilitate certain activities such as product development. It could be possible that, if a MNC has two suppliers for a certain component, they will prefer the supplier that is located closest to their own factory. Even though information can now, as described by Kelly (1999), be more easily distributed in ‘space’, we believe that the significance of a face to face meeting is still high, especially regarding high involvement relationships. Having a high involvement relationship with a customer could make the supplier more willing to follow a MNC into a new market seeing they have invested resources in the relationship. However, it could also have the opposite effect, making the supplier less prone to move. If resources are invested and processes have been adapted, neither company might be willing to break the relationship because of sunk costs. This would make the supplier less replaceable and if the MNC moved into a new market, they might not be willing to change or find a new supplier, seeing they would have to spend time and money in a new relationship. Therefore, a high involvement relationship can have two opposite effects on the location of the supplier. The supplier could decide to follow the MNC due to the advanced products that they deliver. However, a supplier could also decide to stay in their home market, since they are not easily replaceable and given that they can supply into the new market, they do not need to follow the MNC. In figure 5.2 a high involvement could therefore cause both a concentration effect and a dispersion effect. The low involvement suppliers usually supply less complicated products and it is not as important for the MNCs that they follow into a new market. These products can often, as expressed by Scania, be found in the basic industry already established on the market. From the suppliers’ point of view, it is more important that they follow, seeing that they are easily replaceable. Therefore, to secure the business relationship, our thoughts are that the low involvement suppliers are rather concerned with being close to their customers. On the other hand, a supplier that produces a simple component might be less dependent on a certain customer, seeing their product is standardised and used by many different customers. A complicated product or a product close to final assembly, should result in only a few available customers and consequently, the supplier ought to be more dependent on these customers. Therefore, these suppliers are possibly more inclined to secure these business relationships and more willing to follow into a new market.
~ 58 ~
However, in practice the suppliers cannot be close to every customer. According to VTC, whether or not the supplier is located near the production facility is not always important, as long as they can deliver on time and to a reasonable cost. VTC states that lead-time and flexibility determine how close the suppliers need to be. Ericsson focuses on regional supply chains, since they are dependent on large volumes and short lead-times. This however, usually implies that the supplier must have production bases situated at several locations in order to meet the requirements. Scania favours suppliers nearby when transportation costs are significant. On other occasions, a large cost reduction in price renders possible transportation over longer distances. Christopher (1998) claims that large corporations often are too concentrated on cost reductions to realize that the cost of longer pipelines may outweigh the cost saving. Another disadvantage with a long pipeline is the increased risk of transporting cargo over longer distances or as in the case of Scania, where the customers sometimes have to endure long lead-times. All of the theoretical findings point at the benefits of having suppliers nearby, however as mentioned earlier, in practice this may not be possible. Determining where the suppliers are based seems solely dependent on the characteristics of product the suppliers produce, for example: large volumes (can influence the lead-time and flexibility), production time (will also have an effect on lead-time and flexibility) and product size (will influence the transportation costs). When bringing together the theoretical findings with the empirical results, the arrows in figure 5.2 do not need to be modified. The empirical findings, however, gave an explanation to the location of the suppliers. It is important to have suppliers nearby but, it is lead-time, flexibility, volume and transportation costs that will decide where the suppliers are located.
~ 59 ~
Local domestic suppliers
50 % Dispersion Effect
Concentration Concentration Effect Effect
Foreign suppliers
Import 50 % Figure 5.2 Concentration and Dispersion Effects
5.3.3 Control vs. Autonomy When dealing with a global pipeline Christopher (1998) states, that it is crucial that the organisation finds the correct balance between control and local management. To manage and control the extensive network of suppliers, strategic decisions should be taken centrally, while the supervision and control of supplier actions and the daily cooperation with logistics partners ought to be managed locally. Doz (1986) is of the same opinion and claims that transnational investments decisions are usually of a rather complex character and should be taken by top management, resulting in a centralized investment decision function in the majority of network enterprises. According to the theoretical findings, only by having central planning and co-ordination, companies can attain cost minimization and service maximization. The interviewed companies all have hierarchical purchase divisions, governed from the HQs: Ericsson - Group Function Sourcing, Scania - Global Procurement Council and VTC - Global Sourcing Committee. The mission of these units is to find and prepare contracts with suppliers all over the world. The reason for this type of organisation is that they are concerned about offering the exact same product regarding quality and performance all over the world. In order to offer homogenous products, the HQs need to execute strong supervision towards the productions plants, especially regarding the selection of suppliers. The companies also provided company specific reasons for having a central institution performing this kind of activity. For example, VTC expressed the advantage of being able to compare different suppliers according to certain standards. Scania stresses the fear of losing “the Scania thinking”, if local plants were given the freedom to choose suppliers. The negative effects of governing the choice of suppliers on a central level might be the risk of missing out on
~ 60 ~
opportunities offered on the local market. Even though most of the decisions regarding the supplier situation are handled by specific councils or institutions, the responsibility of improving and increasing the efficiency of the current supply structure is often delegated to the local offices. VTC terms their supplier structure as fixed, which indicates that no major changes are occurring. This paragraph show how the theoretical findings reflect the empirical results, i.e. the companies all utilize a strict control from the HQ but with some responsibility delegated to local offices. Regarding for example companies that manufacture consumer products, our view is, that it should be more important to adapt the product to local requirements. Consequently, local agents and production plants might have more influence on product design and also what suppliers to use. When the MNCs concentrate on their core competencies and outsource more to suppliers, the role of the purchaser might change. In order to keep control over the supplier network, the work of the procurement division becomes more complex. They need to make sure, for example, that the level of quality does not deteriorate when dealing with an increased number of suppliers. Furthermore, when the choice of which suppliers to buy from is taken by institutions high up in the hierarchy, our view is that the function of the purchaser is slowly moving towards a coordinating role, which is also the case in VTC. Given that decisions regarding the suppliers are taken by special councils or institutions and the fact that thorough evaluations of each contracted supplier is performed, we believe that a rather stable supplier structure is created in the interviewed companies. They have termed their supplier structure as mature and fixed, however, we have chosen to use the term stable, rather than using the terms provided by the companies, since we find that the word incorporates both. The supplier structure should be, according to us, more stable in higher levels of the tier structure. As mentioned before, a majority of high involvement relationships are found in tier 1, increasing the stability of this level. The empirical material shows that when entering a new market, local suppliers are often found for simple components. This highlights a variation in the composition of the suppliers in lower tier levels, thus making lower levels less stable. Since the competition has moved from between companies to between entire supply chains, there might be a necessity to have a stable supplier structure. If parts of the supplier structure are constantly changing, it might cause confusion and decrease the efficiency of the entire network. The final result would then, in our view, be a less competitive network. Our thoughts are that when the network configuration of companies was not so prevalent, it might have been less
~ 61 ~
important with a stable supply chain. At that time, companies were to a less extent dependent on others, therefore is could have been easier and more profitable to change suppliers often in search for benefits such as cost reductions. Today however, the network configuration requires some sort of stability in order to reach efficiency. The factors presented by Prahalad and Doz (1987) that either enhance or impede the control of the HQ, cannot completely be applied in our case, since they concern control over subsidiaries. We deal with the control over production plants, which entails a closer cooperation than with a subsidiary. A production plant is naturally dependent on the HQ for resources such as technology and finances, seeing that a production plant is an extension of the mother company and not an independent company. The strategic vision and competitive strategy are equivalent, since it is the same company. Systems that recognize contributions to the global strategy are present in the centrally governed organisation and finally loyalty to the HQ is self-explanatory. Our opinion is, that in order for the HQ to maintain the control over the production plants, activities that encourage independence ought to be avoided, for example placing the development at the HQ and not at the production plants. By keeping a bureaucratic procurement organisation, the process of adding new suppliers is complicated, thus further limiting the independence of the production base. The factors that impede the HQ’s control over subsidiaries can be applied more successfully to our case. These factors mainly deals with regulations of the host government and the presence of JV partners, which will all restrict the control the HQ is able to exert, whether or not it concerns a subsidiary or a production plant. The model 5.3 shows our ideas of the effects of the HQ being in control of the choice of suppliers versus the local offices deciding what suppliers to use. Our thoughts are that companies that are centrally governed will be more inclined to continue using those suppliers to which they already have a well established relationship. If those suppliers are not present on the new market imported components will represent a large volume. This is depicted in figure 5.3 with the dashed horizontal arrow. If the old relationship suppliers are present on the new market, they will be preferred, as shown by the dashed vertical arrow in the same figure. If the production bases on the other hand, are in charge of choosing suppliers, they might be more open to the idea of using local domestic suppliers.
~ 62 ~
Being locally present implies being closer to the market and hence more up date with developments in the market place and therefore more exposed to emerging opportunities. This movement is illustrated by the black vertical arrow.
Local domestic suppliers Autonomy Effect
50 % Control Effect Import 50 % Figure 5.3 Autonomy and Control Effects
Foreign suppliers
At the starting point of this thesis we believed that Control vs. Autonomy would be a more influencing factor when constructing a supplier structure on a new market. However, when analysing the empirical findings we have come to the conclusion that this factor rather concerns the maintenance, improvement and further development of the network structure.
~ 63 ~
6 The End of the Path
~
6.1 - How is the internationalisation process performed in a strategic network situation?
Based on the collected information from the interviewed companies, we have constructed an establishment chain for the MNCs adapted to the current business environment. The first step, see figure 6.1, is the decision to enter a new market, initiated by the MNC or a supplier, followed by a rather quick set up of a production plant. The second step can be performed rather rapidly since MNCs have the required resources, knowledge and foremost plenty of experience. Step three entails importing everything or almost everything in the initial phase of the establishment; this is made possible due to a global network of suppliers who are able to supply on a world wide basis. The last step depends on the strategic objective with the establishment.
Continue importing - if presence in the country is the only objective Decision to enter a new market Build up production plant Import complete products in kits Start constructing a supplier network and surrounding sales and marketing functions
Figur 6.1 Establishment Chain
If only presence in the country is sought, due to for example, the small size of the chosen market, importing will continue. This represents a small commitment to a foreign market and can be seen as peripheral activities in a new network. If there are benefits to gain, such as low cost labour or trade regulations forcing a company to buy from the local market, more or less a complete organisation will be established in the country. A complete organisation is, in this aspect, when a MNC makes large investments in the market and starts constructing a supplier network and surrounding sales and marketing functions. This step requires a solid economic base and results in a restructuring of the network on the local market, since the MNC quickly gain a central position.
~ 64 ~
Given that a network needs to be optimised in order to compete effectively, new suppliers from the local market will probably be added. However, no major changes on the current supplier structure will occur and new additions can be seen as complements rather than a restructuring.
6.2 - What factors influence the construction of a supplier structure in a world based on networks?
The factors below, starts with an encompassing perspective and then each following factor will provide more detailed aspects, ending with characteristics originating from company specific factors. • Degree of networking When a change in the economic environment (liberalisation and IT) and competition forced companies to start outsourcing in order to stay competitive, the organisational form changed from single independent companies to members of a network of resources. The network form renders a move or a start up of production abroad to be done in isolation impossible, seeing that every action of a network member will affect the entire network. However, as more companies increase their foreign operations, a large part of the network becomes internationalised, which facilitates a move or a start up of production for a MNC. So, when constructing a strategic network on a new market, suppliers with an international presence have little or no problem with supplying to the new location. In certain occasions, the suppliers are already present on the market before the MNC enters. This renders possible the usage of the same suppliers in several markets. Consequently, there is no need to reconstruct the supplier structure or spend significant resources on finding new suppliers. Thus, the network configuration results in the possibility for a MNC to easily set up production and simply focus on their core competencies. When companies are organised in networks the optimisation of the network becomes an important issue, especially since the competition lies between entire supply chains. Therefore, there is a need to think in terms of the entire network and minimize opportunist behaviour, in order for the whole network to be competitive. Seeing that everybody benefits if they work with a more holistic approach, companies with too much focus on their ‘selfinterest’ will be excluded. The network configuration creates synergies
~ 65 ~
between the suppliers and buying companies, seeing that they can benefit from each other’s competence. It also provides a necessary flexibility for MNCs to respond to opportunities in a fast changing environment. A small change to any part of a network can cause effects on the entire network. However, the controlling function of the MNCs seeks to optimise the network and works actively to minimise any negative effects, which will be more thoroughly explained in the following paragraph. • Level of knowledge A well established MNC represents large assets in terms of resources and experiences accumulated during a long time. A buying company, especially an OEM, will not only be at the centre of a network but also in charge of what suppliers to include. In a network situation, it is important for an OEM to have control, not only in order to assure quality, but also to maintain efficiency. To increase the control over the members of the network, an OEM can utilise strict evaluation procedures and place decisions regarding adding new suppliers on a high level. This creates a hierarchical procurement function. In order to avoid some of the disadvantages of this type of procurement function, i.e. difficulties of adding and switching suppliers, long-term commitments are prioritised. Development between a customer and a supplier where, for example, production processes are adapted, gives rise to high involvement relationships, which creates strong ties in the network. These ties can function as a barrier for outside parties, as well as a security for the involved parties, i.e. neither party is willing to terminate the relationship because of investments made in the relationship. Strong ties in the network, long-term commitment in combination with a complicated and bureaucratic procedure of adding new suppliers, results in a rather stable supplier structure for a MNC. • Type of market The type of structure that will be constructed in a new market will be adjusted to the characteristics of that market, i.e. the type of market. Emerging markets are probably the most likely locations for global corporations to invest in today, especially for manufacturing companies, since these markets render possible the opportunity of, for example, low cost labour. Those markets mainly consist of a basic industry, where the existing networks are weak and in some areas incomplete. Without the presence of
~ 66 ~
strong network barriers, these networks are easy to enter. Especially large foreign corporations are welcomed by the governments as well as by companies, seeing that they can provide the country with, among others, more advanced technology. In an emerging market, where an inflow of FDI probably causes market conditions to constantly change, the network structure is well suited, since it allows a company to quickly respond when market conditions are altered. • Degree of commitment The last factor that affects the construction of the supplier structure is the purpose of the establishment, i.e. the degree of commitment to the market. From the empirical results we have found two different types of establishments: assembly plants or production plants. The former does not represent a large commitment to the new market and can be supported entirely by imports, resulting in the possibility to use the exact same supplier as before. This type of establishment has little or no effect on the supplier network as a whole and the assembly plant can easily be dissembled and moved, if market conditions change. The latter, however, represent a larger commitment and often require the presence of certain suppliers. This could cause some effects in the supplier structure, when new suppliers are added or exchanged. New suppliers can be added due to governmental demands, such as local content, other suppliers might be replaced if they cannot supply to the new market. However, these changes will probably not have any major implications for the network as a whole, seeing that the structure is rather stable.
6.3 Fulfilling our Purpose
Our purpose was to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company, when entering a new market. As mentioned in the answer to the second research question the factors are: network form, established MNC, emerging markets and the objective with the establishment. Our focus was on the construction of a supplier network; however, we found that the existing supplier network is not affected in a significant way when entering a new market. We found that the supplier networks of the MNCs are rather stable with world coverage. Certain local suppliers will be added on the local market but these can be seen as a complement to the original supplier structure, rather than a restructuring. These local suppliers often represent basic components that most likely are cheaper to buy locally than ship over long distances. Therefore, a MNC is
~ 67 ~
capable of, more or less, applying their entire network of suppliers to a new market anywhere in the world. In those cases, where the entire network cannot be used, the gaps are either filled with imports or with new local suppliers, i.e. domestic or foreign suppliers established on the market. It is interesting to note that an organisational form, i.e. the network configuration, originating from an unstable environment, shaped to be able to handle uncertain events and making it possible to quickly adapt to environmental changes, has given rise to a stable network of suppliers. There is almost something contradictory over the fact that an organisational form created to be flexible can be stable at the same time. In conclusion, according to our results, internationalisation in a network based world will not have a significant influence on the current supplier structure of a MNC.
6.4 Further Interest of Study
• Quantitative research on the same subject in order to give the results statistic accuracy. • What would a similar situation look like for medium sized companies?
~ 68 ~
7 Bibliography
~
Amaratunga, D., Baldry, D., Sarshar, M. & Newton, R. (2002), Quantitative and Qualitative Research in the Built Environment: Application of ”Mixed” Research Approach, Work Study, Vol 51 No 1, pp. 17-31 Andersson, S. (2000), Suppliers’ International Strategies, European Journal of Marketing, Vol 36 No ½ p.86-110 Arbnor, I & Bjerke, B. (1997), Methodology for Creating Business Knowledge 2nd Edition, Sage Publications, Thousand Oaks Aronsson, H., Ekdahl, B. & Oskarsson, B. (2003), Modern Logistik – för ökad lönsamhet, , Liber, Lund Atkinson, A., Shaffir, W. (1998), Standards for Field Research on Management Accounting, Journal of Management Accounting Research, Vol 10 Axelsson, B. & Johanson, J. (1992), Foreign Market Entry – the Textbook vs. the Network View, in: Axelsson, B & Easton, G. (ed.) (1992) Industrial Networks – A New view of Reality, Routledge, London Befring, E. (1994), Forskningsmetodik och statistik, Studentlitteratur, Lund Bell, J. (2000), Introduktion Studentlitteratur, Lund till forskningsmetodik, 3:e upplagan,
Burns, T. & Stalker, G. M. (1994), The Management of Innovation Rev. ed (1961), Oxford University Press, Oxford Bäckman, J. & Modorato-Rosta, C. (2004), Constructing a Supplier Network – The Logic Behind the Strategic Options, Bachelor Thesis, University of Linköping Cardone-Riportella, C., Álvares-Gil, M., Lado Cousté, N. & Sasi, V. (2003), The Relative Effects of Clients-Following and Market-Seeking Strategies in the Internationalisation Process of Financial-Service Companies: A Comparison of
~ 69 ~
Spanish and Finnish Entities, International Journal of Management, vol 20, no 3, pp. 384-395 Castells, M. (1996), The Rise of the Network Society, Blackwell Publishers Inc, Cornwall Chandler, A. (1962), Strategy and Structure – Chapters in the History of the Industrial Enterprise (13th printing), The M.I.T Press, Cambridge Christopher, M. (1998), Logistics and Supply Chain Management, Financial Times Prentice Hall, Great Britain Daniels, J., Radebaugh, L. & Sullivan, D. (2004), International Business – Environments and Operations, 10th Edition, Pearson Prentice Hall, New Jersey Doz, Y. (1986), Strategic Management in Multinational Companies, Pergamon Press, Oxford Easton, G. (1992), Industrial Networks: a review, in: Industrial Networks – a New View of Reality, Ed. by Axelsson, B. & Easton, G., Kent: Routledge, London Eriksson L-T. & Wiederheim-Paul, F. (2001), Att utreda forska och rapportera, 7:e upplagan, Liber Ekonomi, Karlshamn Ernst, D. & Kim, L. (2002), Global Production Networks, Knowledge Diffusion and Local Capability Formation, Reserach Policy, Vol 31 p. 1417- 1429 Forsgren, M. & Johanson, J. (1992), Managing Networks in International Business, Gordon and Breach, Philadelphia Gadde, L-H. & Håkansson, H. (2001), Supply Network Strategies, John Wiley & Sons, Ltd, Great Britain (Chippenham) Gadde, L-H. & Snehota, I. (2000), Making the Most of Supplier Relationship, Industrial Marketing Management, Vol 29 p. 305-316 Gattorna, J.L & Walters, D.W. (1996), Managing the Supply Chain, MacMillian Press Ltd, Basinstoke
~ 70 ~
Greis, N., Kasarda, J. & Stock, G. (1999), Logistics, Strategy and Stucture, International Journal of Physical Distribution & Logistics Management, Vol 29 No 4, pp. 224-239 Gummesson, E. (2002), Qualitative Methods in Management Research, 2nd edition, Sage Publications, Inc., Thousand Oaks Håkansson, H., Laage-Hellman, J., Lundgren, A. & Waluszewski, A (1993), Teknikutveckling i företaget – Ett nätverksperskpektiv, Studentlittertur, Lund, Sweden. Hallén, L. (1992), Infrastructural Networks in International Business in: Forsgren, M. & Johanson, J. (ed.) (1992) Managing Networks in International Business, Gordon and Breach Science Publishers S.A., Philadelphia Halvorsen, K. (1992), Samhällsvetenskaplig metod, Studentlitteratur, Lund Hartman, J. (1998), Vetenskapligt tänkande, Studentlitteratur, Lund Holme, I.M. & Solvang, B.K (1997), Forskningsmetodik – Om kvalitativa och kvantitativa metoder, 2:a upplagan, Studentlitteratur, Lund Jacobsen, D. (2002), Vad, hur och varför?, Studentlitteratur, Lund Johanson, J. & Vahlne, J-E. (1977), The Internationalisation Process of the Firm – A Model of Knowledge Development and Increasing Foreign Market Commitments, Journal of International Business Studies, Vol 8 No. 1, p. 23-32 Johansson, J. & Mattson, L-G. (1988), Internationalisation in Industrial Systems – A Network Approach, in: Ford, D. (ed.) (1997) Understanding Business Markets, The Dryden Press, London Johansson, J., Blomstermo, A. & Pahlberg, C. (2002), Företagets internationaliseringsprocess – Lärande i nätverk, Studentlitteratur, Lund Keegan, W & Green, M. (2000), Global Marketing 2nd Edition, Prentice Hall, Inc. New Jersey Kelly, K. (1999), Den nya ekonomin, AB Timbro, Klippan Klint, M. & Sjöberg, U. (2003) Towards a Comprehensive SCP-model for Analysing Strategic Networks/Alliances, International Journal of Physical Distribution & Logistics Management, Vol 33 No. 5 p. 408-425
~ 71 ~
Kvale, S. (1997), Den kvalitativa forskningsintervjun, Studentlitteratur, Lund Laurence, P.D. (2000), Developing in Harmony, International Journal of Physical Distribution & Logistics Management, Vol 30 No 5, pp. 409-412 Lawrence, P. & Lorsch, J. (1967), Organization and Environment – Managing Differentiation and Integration (7th printing), Division of research, Graduate School of Business Administration, Harvard University, USA Lukka, K. (1995), The Problem of Generalizability: Anecdotes and Evidence in Accounting Research, Accounting, Auditing & Accountability Journal, Vol 8 No 5, pp 71-90 Lundahl, U. & Skärvad, P-H. (1999), Utredningsmetodik för samhällsvetare och ekonomer, Studentlitteratur, Lund McDougall, P. & Oviatt, B. (2000), International Entrepreneurship: the Intersection of two Research Paths, Academy of Management Journal, Vol 43 No 5, pp. 902-906 Miles M.B. & Huberman A.M. (1994) in: Amaratunga, D., Baldry, D., Sarshar, M. & Newton, R. (2002), Quantitative and Qualitative Research in the Built Environment: Application of ”Mixed” Research Approach, Work Study, Vol 51 No 1, pp. 17-31 Mohrman, S., Tenkasi, R. & Mohrman Jr. A (2003), The Role of Networks in Fundamental Organizational Change - A Grounded Analysis, The Journal of Applied Behavioral Science, Vol. 39 No. 3, p. 301-323 Ohmae, K. (1995), The End of the Nation State, McKinsey & Company Inc., London Olusoga, S. Ade (1993), Market Concentration versus Market Diversification and Internationalization: Implications for MNE Performance, International Marketing Review, Vol 10 No.2 p. 40-59 Patel, R. & Davidson, Studentlitteratur, Lund B. (2003), Forskningsmetodikens grunder,
Patel, R. & Tebelius, U. (1987), Grundbok i forskningsmetodik, Studentlitteratur, Lund
~ 72 ~
Prahalad, C.K. & Doz, Y. (1987), The Multinational Mission, The Free Press, New York Rahman, Z. & Bhattacharyya, S.K. (2003), Sources of First Mover Advantages in Emerging Markets – an Indian Perspective, European Business Review, Vol 15 No 6 pp 361-371 Reid. S (1983) in: Johansson, J. & Mattson, L-G. (1988), Internationalisation in Industrial Systems – A Network Approach, in: Ford, D. (ed.) (1997) Understanding Business Markets, The Dryden Press, London Rudberg, M. & Olhager, J. (2003), Manufacturing Networks and Supply Chains: An Operations Strategy Perspective, The International Journal of Management Science, Vol 31, p. 29-39 Saffo in: Kelly, K. (1999), Den nya ekonomin, AB Timbro, Klippan Seyed-Mohamed & Bolte, (1992), Taking a Position in a Structured Business Network, in: Forsgren, M. & Johanson, J. (ed.) (1992) Managing Networks in International Business, Gordon and Breach, Philadelphia Skjoett-Larsen, T. (2000), European Logistics Beyond 2000, International Journal of Physical Distribution & Logistics Management, Vol.30 No 5 Thurén, T. (1998), Vetenskapsteori för nybörjare, Liber AB, Stockholm Zsidisin, G., Panelli, A. & Upton, R. (2000), Purchasing Organisation Involvement in Risk Assessments, Contingency Plans, and Risk Management: an Exploratory Study, Supply Chain Management: An International Journal, Vol 5 No 2 p. 187-197
Electronic Sources
www.ericsson.com www.scania.com www.volvo.com
~ 73 ~
Interviews
Ericsson: December 9th, 2004 Anna Anhfalk, Manager Electromechanics, Group Function Sourcing Thomas Andersson, Manager Electronic Manufacturing Services, Group Function Sourcing Scania: November 24th, 2004 Marianne Petterson, Process Engineer Purchasing Olle Wengelin, Purchasing Manager Volvo Truck Corporation: November 26th, 2004 Lennart Carlsson, International Manufacturer Director Alf Karlsson, Supplier Improvement Coordinatior Tryggve Kristenson, Business Strategy Manager
~ 74 ~
8 Appendix
~
Intervjufrågor Intervjuperson: Titel: År på företaget: 1. Hur många länder är ni aktiva i? 2. Hur många länder har ni produktion i? 3. Hur stor del av värdet tillför ni produkten och hur mycket är utlagt på underleverantörer? 4. a) b) c) d) e) f) g) h) i) j) Hur ser ert underleverantörsnätverk ut i Tier 1 Hur många leverantörer finns i Tier 1? Hur långt ner i Tier-strukturen kan ni påverka/är ni involverade? Långa/korta relationer? Hur pass kostnadsstyrda är relationerna? Finns det några leverantörer som inte är utbytbara, varför och hur påverkar det er relation? Hur ser er beroendeställning ut till era underleverantörer? Är några av era underleverantörer dotterbolag? Vad är trenden, har antalet leverantörer utökats eller minskat? Var tas besluten angående val av leverantörer? Hur självständiga är produktionsbaserna i förhållande till huvudkontoret? För- och nackdelar? Var sker produktutvecklingen?
5. Var har ni placerat era produktionsbaser, och vad är tanken bakom dessa val? 6. Hur försörjer ni marknader där ni inte har produktion? 7. Hur är leverantörerna fördelade över världen? 8. Hur viktigt är det att ha geografisk närhet till era underleverantörer? 9. Vilken var den senaste marknaden ni gick in i med produktion? k) Hur såg processen ut vid uppbyggandet av underleverantörsnätverket? 10. Har utlandsetableringsprocessen förändrats? 11. Vad tas i beaktande vid en utlandsetablering idag? 12. Hur stor påverkan har syftet med etableringen på etableringsstrategin?
~ 75 ~
doc_103574229.pdf
In economics, internationalization has been viewed as a process of increasing involvement of enterprises in international markets
Internationalisation in a Network Based World
- Effects on the Supplier Structure
J. Bäckman & C. Modorato – Rosta January 2005
Avdelning, Institution Division, Department Ekonomiska institutionen 581 83 LINKÖPING
Datum Date 2005-01-20
Språk Language Svenska/Swedish X Engelska/English
Rapporttyp Report category Licentiatavhandling Examensarbete C-uppsats X D-uppsats Övrig rapport ____
ISBN
ISRN LIU-EKI/IEP-D--05/015--SE Serietitel och serienummer Title of series, numbering ISSN
URL för elektronisk version http://www.ep.liu.se/exjobb/eki/2005/iep/015/
Titel Title
Internationalisation in a Network Based World - Effects on the Supplier Structure
Författare Author
Jenny Bäckman & Charlotte Modorato-Rosta
Sammanfattning Abstract The organisational forms of companies have undergone a transformation from a hierarchal structure towards a network based form. The network form has proven to be the best structure for the current competitive environment. With technological advancements in almost every area it has become almost impossible to produce everything “in-house” and still stay competitive. This has caused an increase in the degree of outsourcing parts of the value chain to suppliers. Therefore, the competition has now moved from between companies to between entire value chains. For a manufacturing company, with a large part of the value chain outsourced to suppliers the task of setting up production in a new market brings forth new questions such as: is it possible to move an entire value chain to a new country? The purpose of this thesis is to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company when entering a new market. The purpose was divided into two research questions: How is the internationalisation process performed in a strategic network situation and what factors influence the construction of a supplier structure in a world based on networks? Three multinational companies with a large part of their value chain outsourced to suppliers were chosen for interviews: Ericsson, Scania and Volvo Truck Corporation.
The internationalisation process of a manufacturing company is conducted as follows: the first step is the decision to enter a new market followed by a rather quick set up of a production plant. In this initial phase of the establishment, everything or almost everything is imported which is possible due to a global network of suppliers. The last step depends on the strategic objective with the establishment, either importing will continue or a complete organisation will be established in the country. A complete organisation is in this aspect when the company makes large investments in the market and starts constructing a supplier network, surrounding sales and marketing functions. Factors influencing the internationalising process are: degree of networking, the type and structure of the network surrounding the company; level of knowledge, the accumulated experience of operating in foreign markets; type of market, the characteristics of the market and degree of commitment i.e. will an entire organisation be built up or will importing suffice.
Nyckelord Keyword Supplier structure, internationalisation, network, supplier network, strategic network
Avdelning, Institution Division, Department Ekonomiska institutionen 581 83 LINKÖPING
Datum Date 2005-01-20
Språk Language Svenska/Swedish X Engelska/English
Rapporttyp Report category Licentiatavhandling Examensarbete C-uppsats X D-uppsats Övrig rapport ____
ISBN
ISRN LIU-EKI/IEP-D--05/015--SE Serietitel och serienummer Title of series, numbering ISSN
URL för elektronisk version http://www.ep.liu.se/exjobb/eki/2005/iep/015/
Titel Title
Internationalisering i en nätverksbaserad värld - Effekter på leverantörsstrukturen
Författare Author
Jenny Bäckman & Charlotte Modorato-Rosta
Sammanfattning Organisationsformen hos stora företag har förändrats från hierarkiska strukturer till nätverksbaserade organisationer. Nätverksformen har visat sig var den mest lämpade företagsformen för dagens affärsklimat. Forskning och utveckling har bidragit till att företag inte längre kan producerat allt själva utan måste i större utsträckning samarbeta med sina leverantörer för att bibehålla sin konkurrenskraft. Detta har lett till en ökning av ”outsourcing” hos tillverkandeföretag. Konkurrensen har därmed förflyttats från att vara mellan företag till att vara mellan hela värdekedjor. När en stor del av tillverkningen är utlagd på underleverantörer blir processen av att flytta produktionen utomlands förändrad. Går det, exempelvis, att flytta en hel värdekedja till en ny marknad? Syftet med uppsatsen är att undersöka vilka faktorer som påverkar konstruktionen av ett strategiskt nätverk av underleverantörer för ett tillverkandeföretag vid ett inträde på en ny marknad. Syftet är indelat i två problemfrågor: Hur går internationaliseringsprocessen till i en strategisk nätverkssituation och vilka faktorer påverkar konstruktionen av leverantörsstrukturen i en nätverksbaserad miljö? Tre multinationella företag med stora delar av värdekedjan utlagd på underleverantörer blev intervjuade: Ericsson, Scania och Volvo Lastvagnar. Internationaliseringsprocessen för ett tillverkandeföretag består av följande steg. Beslutet av att starta upp produktion på en ny marknad följs av en snabb uppbyggnad av en hopsättningsfabrik. I början kan allt eller nästan allt importeras eftersom flertalet av leverantörerna är globala och kan
leverera till de flesta marknader utan problem. Det sista steget beror på målsättningen med etableringen, antingen fortsätter företaget att importera eller så bygger man upp en leverantörsstruktur och omkringliggande marknads- och säljfunktioner. Faktorerna som påverkar denna internationaliseringsprocess är: samarbetsformer, nätverksstrukturen som omger företaget; ansamlad kunskap, erfarenheterna av verksamheter utomlands; marknadstypen, säregna drag för marknaden och grad av åtagande dvs. kommer en hel organisation att etableras eller kommer import räcka för att försörja den nya marknaden.
Nyckelord Leverantörsstruktur, nätverk, leverantörsnätverk, strategiska nätverk
List of Abbreviations
~
ASEAN BU CBU CKD FDI GPN HQ IT JV MNC OEM SBU VTC Association of Southeast Asian Nations Business Unit Completely Built Up Completely Knocked Down Foreign Direct Investment Global Production Network Headquarters Information Technology Joint Venture Multinational Corporation Original Equipment Manufacturer Strategic Business Unit Volvo Truck Corporation
Table of Contents
1 INTERNATIONALISATION IN A NETWORK BASED WORLD...... 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 INTRODUCTION ......................................................................................... 1 FROM HIERARCHY TO NETWORK .............................................................. 1 PROBLEM DISCUSSION............................................................................... 4 PURPOSE ................................................................................................... 5 RESEARCH QUESTIONS ............................................................................. 5 DEMARCATIONS ........................................................................................ 5 STRUCTURE .............................................................................................. 6
OUR PATH TOWARDS REACHING A RESULT ................................. 7 2.1 THE SCIENTIFIC APPROACH PATH............................................................. 7 2.2 OUR PATH DURING THE PROCEDURE ........................................................ 9 2.3 PRACTICAL PATH .................................................................................... 11 2.3.1 Analysing the findings ........................................................................ 13 2.4 CRITICISM OF OUR CHOSEN PATHS......................................................... 14 2.4.1 Validity ............................................................................................... 14 2.4.2 Reliability ........................................................................................... 15 2.4.3 Generalisation.................................................................................... 15 2.4.4 Criticisms of Sources ......................................................................... 16
3
THE INTERNATIONALISATION PROCESS IN THEORY.............. 17 3.1 SUPPLY CHAIN OR STRATEGIC NETWORK?............................................. 18 3.1.1 Managing the Supply Chain as a Network ........................................ 19 3.2 PURPOSE OF GOING ABROAD ................................................................... 20 3.2.1 Market Seeker..................................................................................... 20 3.2.2 Resource Seeker ................................................................................. 21 3.2.3 Minimizing the Risks .......................................................................... 21 3.3 INTERNATIONALISATION PROCESS .......................................................... 22 3.3.1 Internationalisation from a Network Perspective.............................. 23 3.3.2 Emerging Markets.............................................................................. 25 3.4 THE PARADOXES .................................................................................... 25 3.4.1 High vs. Low Involvement.................................................................. 26 3.4.2 Concentration vs. Dispersion............................................................. 29 3.4.3 Control vs. Autonomy......................................................................... 31
4
INTERNATIONALISATION PROCESS IN PRACTICE.................... 35 4.1 PRESENTATION OF THE INTERVIEWEES AND THE COMPANIES ................. 35 4.2 TIER STRUCTURE .................................................................................... 36 4.3 INTERNATIONALISATION PROCESS .......................................................... 36 4.4 THE PARADOXES .................................................................................... 41 4.4.1 High vs. Low Involvement.................................................................. 41 4.4.2 Concentration vs. Dispersion............................................................. 46 4.4.3 Control vs. Autonomy......................................................................... 47
5
REACHING THE END OF THE PATH................................................. 50 5.1 NETWORK ASPECTS ................................................................................. 50 5.2 THE INTERNATIONALISATION PROCESS TODAY ...................................... 52 5.3 THE PARADOXES .................................................................................... 55 5.3.1 High vs. Low Involvement.................................................................. 55 5.3.2 Concentration vs. Dispersion............................................................. 57 5.3.3 Control vs. Autonomy......................................................................... 60
6
THE END OF THE PATH ........................................................................ 64 6.1 6.2 6.3 6.4 - HOW IS THE INTERNATIONALISATION PROCESS PERFORMED IN A STRATEGIC NETWORK SITUATION? .......................................................... 64 - WHAT FACTORS INFLUENCE THE CONSTRUCTION OF A SUPPLIER STRUCTURE IN A WORLD BASED ON NETWORKS?..................................... 65 FULFILLING OUR PURPOSE ...................................................................... 67 FURTHER INTEREST OF STUDY ................................................................ 68
7 8
BIBLIOGRAPHY....................................................................................... 69 APPENDIX ................................................................................................. 75
List of Figures
FIGURE 2.1 COMPONENTS OF DATA ANALYSIS: AN INTERACTIVE MODEL .............. 13 FIGURE 3.1 THE SUPPLY CHAIN AS A NETWORK .................................................. 19 FIGURE 3.2 SUPPLIER NETWORK STRUCTURE ....................................................... 26 FIGURE 3.3 HIGH AND LOW INVOLVEMENT EFFECTS ........................................... 29 FIGURE 3.4 CONCENTRATION AND DISPERSION EFFECTS ..................................... 31 FIGURE 3.5 AUTONOMY AND CONTROL EFFECTS ................................................. 34 FIGURE 4.1 TIER STRUCTURE ............................................................................... 36 FIGURE 4.2 SCANIA'S SUPPLIER CATEGORIES SOURCE: SCANIA .......................... 43 FIGURE 4.3 SCANIA'S MATRIX FOR PROCUREMENT SOURCE: SCANIA ................. 44 FIGURE 5.1 HIGH AND LOW INVOLVEMENT EFFECTS ........................................... 57 FIGURE 5.2 CONCENTRATION AND DISPERSION EFFECTS ..................................... 60 FIGURE 5.3 AUTONOMY AND CONTROL EFFECTS ................................................. 63 FIGUR 6.1 ESTABLISHMENT CHAIN ....................................................................... 64
List of Tables
TABLE 2.1 PRESENTATION OF THE COMPANIES .................................................... 11 TABLE 2.2 PRESENTATION OF THE INTERVIEWEES ................................................ 11 TABLE 3.1 CONTROL OVER SUBSIDIARY OPERATIONS IN A MNC ........................ 33 TABLE 4.1 PRESENTATION OF INTERVIEWEES ....................................................... 35 TABLE 4.2 COMPANY PRESENTATION ................................................................... 35
1 Internationalisation in a Network Based World
~
1.1 Introduction
The organisational forms of companies have undergone a successive change from a hierarchical structure to a more decentralised and organic structure, where quick adaptation to the environment is possible. This chapter starts with a presentation of theories dealing with the organisational form of companies and their development into a network structure. This leads to the problem discussion regarding internationalisation in a network-based world.
1.2 From Hierarchy to Network
In their book Organisation and Environment from 1967, Lawrence and Lorsch provide, a short review of what they call classical organisational theories such as those of Urwick and Fayol originating in the 1920s. These theories recommend ‘a highly structured authoritarian system’ for large corporations, where the power is located at the top and successively diminishes for each descending level. Basically, highly formalised structures with a commanding and controlling leadership style will lead to better performance. These theories however need to be adapted to the advances in science and related technology industries and to the increasing uncertainty in the competitive environment, according to Lawrence and Lorsch (1967). The authors suggest that organisations need to reduce the degree of structure and lengthen their time horizon in order to be competitive. Lawrence and Lorsch (1967) have seen indications that companies with a less hierarchical structure are more suitable to manage uncertain and diverse environmental conditions. In their view, successful organisations are better at adapting to the environmental demands than their less successful competitors. The results from the research performed by Lawrence and Lorsch regarding the environment’s effect on the organisational design, is in accordance with results reached by Burns and Stalker in their research performed in the 1950s. Burns and Stalker (1994) examined patterns of management practices related to the external environment and they found two types of management methods: the mechanistic and the organic. The former is a type of hierarchy well suited for a stable environment, while the latter is more decentralised where communication takes place across levels of management, preferable for a company operating in
~1~
an unstable environment. In line with this thinking are Chandler’s theories of strategy and structure. The organisational structure follows and is determined by strategic decisions, according to Chandler (1962), and new strategic choices derives from environmental changes. “Strategic growth resulted from an awareness of the opportunities and needs – created by changing population, income and technology – to employ existing or expanding resources more profitably.” Chandler, 1962 (p.15) In short, Chandler (1962) reasons that environmental changes influence the strategy which in turn influences the choice of the appropriate organisational structure. Different kinds of organisations are therefore necessary for effectively handling different strategies and environments. In a stable environment, a hierarchical structure can be successful. However in other circumstances, the disadvantages of such a structure, for example trusting a few key actors with complex decisions, is obvious. The organisational structure of a company can, as expressed by Lawrence and Lorsch (1967), be seen as a system. As the system grows, it becomes differentiated into different parts that need to remain integrated in order for the whole system to function. An important function of any system is adjustment to the world outside. Lawrence and Lorsch’s (1967) thoughts of the future are, to a large extent still valid today, when they claim that the speed of technological change is increasing resulting in more complex products and production processes. Corporations are becoming more multinational as they are expanding their business activities to a global scale. These trends have just started, and according to Lawrence and Lorsch (1967), forecasts point at an acceleration in the future. During the 1970s, the internationalisation process of manufacturing companies, as described by Rudberg and Olhager (2003), was highly dependent on achieving economies of scale. Products were manufactured on the home market and exported to international clients. If the international business was successful, the company established sales offices around the world. However, there was a need for more manufacturing facilities and companies developed into multiplant organisations. Even if markets were becoming more global during this period, manufacturing was still quite geographically concentrated. Despite the multi-plant structure, the organisation was managed according to the old singlefactory strategy, i.e. each plant was treated separately. During the late 1980s,
~2~
globalisation increased the competitive pressure and in order to stay competitive, companies needed to establish on a wider international basis. Factories could not longer be treated as seperate entities; there was a need for a more holistic view where each factory influences and is influenced by the entire network of factories. Companies started to think in terms of networks, since the organisational form had evolved from national manufacturing into regional and global manufacturing (Skjoett-Larsen, 2000). Ernst and Kim (2002) present three globalisation drivers behind this shift in industrial organisation: institutional change through liberalisation, information technology (IT) and competition. The first driving force, liberalisation, has sparked an expansion of trade and foreign direct investment (FDI). The overall result has been a considerable reduction of costs and risks of international transactions. The development of IT has increased the mobility, making it possible to spread company-specific resources across national boundaries as well as link and coordinate economic transactions between distant locations. One of the first effects of using computers as means of communication was the “break-up” of the traditional value chain, for example, the importance of middlemen distributing goods decreased significantly (Kelly, 1999). The third driver is a change in the dynamics of competition caused by the liberalisation and IT development. The geographic scope of competition has increased, meaning the competition now cuts across country borders. Laurence (2000) claims that companies no longer see separate country markets but view their potential markets in regional terms, such as the entire European Union as one market. Furthermore Ernst and Kim (2002) claim, it is impossible for companies, even market leaders, to internally generate all the capabilities needed to cope with the global competition. Skjoett-Larsen (2000) even argues that the largest potential for improvements is found outside the corporation. According to Gadde and Snehota (2000), the relationships and linkages a company can create with external organisations are a new source of competitive advantage. Therefore the success of a company is highly related to its ability to source specialized capabilities outside the firm (Ernst & Kim, 2002). In order to benefit from the suppliers’ special knowledge, buying companies are involving the suppliers at a much earlier stage, e.g. in the product development phase (Aronsson et al, 2003). The organisational form of manufacturing companies have therefore evolved further, from only seeing the own company configuration as a network into regarding the company as a part of a dispersed network of resources, external as well as internal (Ernst & Kim, 2002; Rudberg & Olhager, 2003). This network configuration provides the companies with an increased flexibility necessary to respond to market opportunities (Ernst & Kim,
~3~
2002; Gries et al 1999). Saffo in Kelly (1999) calls this a transition from value chain into value web while Castells (1996) simply state: “Networks are the fundamental stuff of which new organizations are and will be made.” Castells, 1996 (p.168) There is coherence in the literature regarding the change in the organisational form of the manufacturing companies. However, there seems to be an inconsistency in what to call this phenomenon. Rudberg and Olhager (2003) termed it manufacturing network, Gries et al (1999) named it the new manufacturing enterprise, Castells (1996) labelled it the network enterprise, while Ernst and Kim (2002) called it the global production network (GPN).
1.3 Problem discussion
In this new network society the focus is on the network a company is included in as oppose to the conventional view where the attention was on the company as a single entity (Kelly, 1999). Traditionally, when discussing competition it is referred to the competition between companies, today however, the competition is between entire value chains (Aronsson et al, 2003). In this new form of competition it is logical that the choice and selection of suppliers is increasing in strategic importance. Including the ‘right’ suppliers in the value chain can be the factor that either leads to the road of success or contributes to the downfall of a company (C.f Håkansson et al, 1993). Christopher (1998) claims that technological change and production efficiencies have resulted in a majority of companies, in almost every industry, are now able to produce greater quantity to a lower cost than before. In order to stay competitive, companies must continually seek ways in which costs can be reduced, e.g. optimise the supply chain or search for low cost production locations (ibid). What does the internationalisation process, in terms of moving production into a new country, look like when the competition has changed from between corporations to between entire value chains? In order to benefit from lower production costs it is not only the company that needs to move, it is the entire network. Therefore, the issue of internationalisation, now under different circumstances, brings forth new questions. Is a company capable of moving an entire network or can they only move parts of it? If a company cannot move the entire network, how do they fill the missing gaps in their supply chain structure? In other words, what issues are critical when a manufacturing company decides to enter a new market, seeing their high dependency on the other actors in their
~4~
immediate network? After reviewing literature about the internationalisation process, we have found that there is a scarce amount of theories that offer an explanation of this process from a strategic network perspective1, which leads us to our purpose.
1.4 Purpose
The purpose is to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company when entering a new market.
1.5 Research Questions
In order to be able to fulfil our purpose we have constructed two research questions that will guide us through the study. 1. How is the internationalisation process performed in a strategic network situation? 2. What factors influence the construction of a supplier structure in a world based on networks? Seeing that internationalisation in networks is a rather recent phenomenon our focus will be on countries and markets that recently have been opened for foreign investments, i.e. emerging markets such as China or Eastern Europe.
1.6 Demarcations
This master thesis will focus on the internationalisation process of manufacturing companies in terms of establishing a network in a foreign market. Instead of providing a more general business network perspective, we have chosen to narrow down the scope of this thesis and only focus on strategic networks in this process. We will not treat any issues regarding other aspects of the internationalisation process such as marketing, country/location selection, cultural differences etc.
1
See section 3.1 for explanation of the term strategic network
~5~
1.7 Structure
Chapter 1 Internationalisation in a Network Based World Presentation of the study and the area of interest
Chapter 2 Our Path towards Reaching a Result A description of how the research was performed
Chapter 3 Internationalisation Process in Theory Theoretical findings
Chapter 4 Internationalisation Process in Practice – The Path of Three Companies Presentation of the empirical material
Chapter 5 Reaching the End of the Path Analysis
Chapter 6 The End of the Path Results
Appendix Interview questionnaires
~6~
2 Our Path towards Reaching a Result
~
In our research we were faced with different choices, crossroads, which would guide our study in different directions. This chapter presents our chosen paths in the multitude of research options.
2.1 The Scientific Approach Path
Our role as researchers for this master thesis is to provide knowledge in the cross section between the two subjects of internationalisation and supply chain management. Knowledge is according to Amaratunga et al (2002), produced through research. Scientific knowledge is gained by using scientific methods in order to produce reliable results (Patel & Tebelius, 1987). To collect the data for this thesis we have used scientific methods as well as theories with a scientific background, hence the knowledge we present is intended to be scientific. The goal of our research is to fulfil our purpose; therefore all our methodological decisions are based on what we have concluded to be the most appropriate alternative in order to achieve that goal. The chosen scientific approach of a research will affect the development and outcome of the study (Patel & Tebelius, 1987). The starting point of this thesis lies in the results of our bachelor thesis2. We wanted to develop and complement our findings by further developing our own knowledge within the chosen subject. In combination with interviews, we wanted to gain a more thorough understanding of the internationalisation process of manufacturing companies in a network based world, in order to find out how the construction of the supplier structure is influenced. This leads us towards the hermeneutic approach in our quest for understanding this phenomenon (C.f. Arbnor & Bjerke, 1997). The hermeneutic view has developed from solely an interpretation of texts into including interpretations of acts, symbols and other social phenomena that can be incorporated within the social sciences (Patel & Davidson, 2003; Hartman, 1998). In line with this thinking comes the idea that the world is socially constructed and that the researcher must utilize a subjective approach (Patel & Tebelius, 1987). Our opinion is that the result of a study is always conditioned by the values, prior knowledge and experiences of the researchers. Our prior knowledge was the one gained during our bachelor thesis. This knowledge included theoretical aspects as well as empirical ones seeing that some of the
2
Constructing a Supplier Network in China – The Logic Behind the Strategic Options (2004)
~7~
companies included in this thesis also were a part of our prior research. We were therefore familiar with the interviewed companies which facilitated the data collection process, since we were to some extent already acquainted with their terminology and their products. Holme and Solvang (1997) claim that research within social sciences cannot be completely neutral, and it is impossible to be completely separated from one’s own views and thoughts. The interpretations of the collected data will therefore be influenced by our previous knowledge and experiences as well as by the knowledge we acquired during this process. In the hermeneutic view, it is the previous knowledge that renders an interpretation possible (Patel & Tebelius, 1987) and it is impossible to be completely unbiased towards the objects of study (Holme & Solvang, 1997). However, the fact that we are two authors to this thesis, as well as the guidance from two mentors in combination with several meetings with our study group, lead us to regard other viewpoints than our own thus resulting in a wider perspective. Furthermore, we strived for an objective and matter-of-fact approach in our method as well as in our presentation of the research, in order to limit our influence on the final result. Even though we would have liked to enter this research with a clean slate, our research questions would still have pointed us in a certain direction, or as Popper (1965) in Atkinson and Shaffir (1998) puts it: “Observation is always selective.”3. Therefore the aim of this chapter is to convey our perspective and the methods which have provided the basis for this research to the reader (C.f. Atkinson & Shaffir, 1998). This will facilitate for the reader to form an opinion of the results we have reached. During our research, we have found that the hermeneutic approach often is put in contrast to the positivistic view point; therefore we have chosen to briefly present this approach. Although, bear in mind, is that there are other scientific approaches as well, for example, the phenomenological (interpretive) (C.f. Amartunga et al, 2002). However, these will not be dealt with, since the hermeneutic and the positivistic seems to be the two dominating schools. The positivistic approach states that there are only two ways of reaching knowledge; through our five senses and through what we can conclude with our common sense by discussing and using our logical thinking (Thurén, 1998). Scientific facts should always be objective and measurable. The positivistic approach eliminates the human factor from the research and therefore rejects the hermeneutic method of investigation, since it is based on human interactions (Kvale, 1997). In the following section we will explain why human interactions were important to our research which highlights the usefulness of a hermeneutic approach rather than the positivistic.
3
p. 52
~8~
2.2 Our Path during the Procedure
Since the idea of this thesis originates in our previous research, a deductive study was the most appropriate way of performing this task. A deductive approach implies working with theories as a starting point, in order to acquire knowledge about a certain phenomenon, further gather empirical material and see if the theory concurs with what is observed (Jacobsen, 2002). Our first step was to explore some of the theories used in our bachelor thesis further, and then to collect empirical material. The data collection took place about half way through the study and influenced the theoretical frame of reference, when new information was added. Therefore, our research has traits of an inductive approach as well. Summing up, the research questions in the previous chapter are theory driven, whereas the research following the empirical collection part is a combination of inductive and deductive research. With our purpose in mind we chose to perform a qualitative study, therefore all empirical material was assembled through personal interviews. Our opinion is that a quantitative study provides too static answers and given that we do not have the complete knowledge of the situation in advance, we need the possibility to have an open dialogue with the respondents. As a consequence, the interviews took the form of a discussion rather than simple questioning and answering, since we wanted to know how these companies reason when entering a new market. As Amaratunga et al (2002) describe it: qualitative data has a strong potential for revealing complexity, which is why we have chosen the qualitative approach, seeing that it allows us to have dialogues with the interviewees. Amaratunga et al (2002) also propose to use triangulation, i.e. a combination of quantitative and qualitative methods, to increase the credibility of a study. The scope of our study makes it impossible for us to perform a triangulation. However if we, in this study, are able to identify influencing factors on the construction of a supplier structure on a new market, a quantitative study might prove if those factors are applicable to a wide variety of companies with statistic accuracy. Therefore our suggestion is to carry out a quantitative study as a next step, thus accomplishing a triangulation of our study. Our research questions are of a quite complex character and we have therefore chosen to study only a few companies, i.e. cases, in order to get a deeper understanding of the area of study. There is no general definition of what a case study is and how it should be performed (Jacobsen 2002). However, a definition that we think describes our method of investigation is portrayed by Andersen (1997) in Jacobsen (2002): a case study is about choosing one or a couple of cases that are being put in focus for detailed investigation. According to Bell (2000), there is a great advantage of doing a case study, since it gives the
~9~
researcher the opportunity to concentrate on a special event and to see what factors influence that particular phenomenon. This type of information can sometimes be overlooked in a survey investigation; nevertheless, it can still be highly influential for how a system or an organisation functions. The chosen cases were selected on the basis of what we believed would be the most substantial for our study. This is according to Halvorsen (1992) a common way of gathering qualitative data, especially when the selection is small. It was important to choose wisely in order to get the appropriate information; therefore the companies we contacted had to fulfil certain criteria in order to be included in the research: - Multinational corporation (MNC) A large presence on several markets implies an extensive experience of the internationalisation process. - Certain percentage of the value adding activities are outsourced and performed by the suppliers This criterion is essential in order to gain the network perspective in the internationalisation process. - Offers a tangible product and not a service Producing companies with complex products are dependent on suppliers to a higher degree than those who provide a service. Furthermore, most of the internationalisation theories are based on manufacturing companies. - Headquarters in Sweden The last requirement is of a practical nature. The persons most suited for our research are probably to be found in higher positions within the company since the character of our study regards strategic decisions taken at a high management level. Seeing that we do not have the possibility to do extensive travelling, the headquarters (HQ) must be situated within Sweden. We also preferred meeting persons face to face instead of conducting a series of telephone interviews or corresponding via email. The experiences from our bachelor thesis is, that a meeting in person renders more information and offers better possibilities for both of us to participate and ask questions than telephone interviews.
~ 10 ~
2.3 Practical Path
The empirical part of the study was gathered through interviews with three companies: Ericsson, Scania, and Volvo Truck Corporation (VTC). These companies all fulfil our selection criteria:
Global Presence Ericsson Scania Volvo Truck Corporation Presence: 140 countries Production: 3 countries Presence: 100 countries Production: 5 countries Presence: 130 countries Production: 12 countries Outsourced activities4 85 % 50 % 75 % Product Systems Trucks Trucks Location of HQ Stockholm Södertälje Gothenburg
Table 2.1 Presentation of the Companies
Respondents can be classified, according to Jacobsen (2000), as primary or secondary sources. A primary source is someone that has experienced the process or has been a part of a company for a long time, while a secondary source is someone that has not personally been involved in the process (ibid). The interviewees have all obtained high positions in their companies (see table 2.2), which indicate competence within their line of business. Using the classification of Jacobsen (2000), all of our respondents are primary sources.
Ericsson Anna Ahnfalk Thomas Andersson Scania Volvo Truck Corporation Marianne Pettersson Olle Wengelin Alf Karlsson Lennart Carlsson Tryggve Kristenson Manager Electromechanics Group Function Sourcing Manager Electronic Manufacturing Services Group Function Sourcing Process Engineer Purchasing Purchasing Manager Supplier Improvement Coordinator International Manufacturing Director Business Strategy Manager
Table 2.2 Presentation of the Interviewees
Since all of our respondents can be classified as primary sources this justifies, according to us, the rather small number of interviewees. By talking to the ‘right’ persons the selection of interviewees does not need to be large. Our opinion is that more respondents do not necessarily mean better information.
4
Percentage of the value of the final product added by suppliers
~ 11 ~
2.3.1 Interviews Lundahl and Skärvad (1999) use the term structured interview, if the interview fulfils two criteria: the interviewee should be informed in advance about the objective of the interview and the interview should be focused on information gathering. Our interviews fulfil these criteria and can therefore be regarded as structured interviews. The opposite of a structured interview is a free interview; this type of interview often focuses on opinions, attitudes and values of the interviewee (Lundahl & Skärvad, 1999). A few days before the interviews, we sent out the questionnaire to the respondents in order to give them the possibility to prepare. Since our questions were covering more than one area, this gave the respondents the opportunity to consult with other colleagues if there were questions that they could not answer fully themselves. We believe that sending out the questions in advance only had a positive effect since it, in certain cases, resulted in an interview with different persons than those who had initially received the questions. This gave us the opportunity to meet with those most suited to answer our questions. The interviews took between one and two hours and we were both present during all interviews. To make sure that no information was lost during the conversation, we used a tape recorder which enabled both of us to fully participate in the discussions. Jacobsen (2002) claims that a tape recorder can affect the respondent in a negative way, making the respondent feel uncomfortable. We believe that the tape recorder did not have any significant influence on the respondents. If there were negative effects, we consider the benefits from recording to outweigh the disadvantages. We would never have been able to collect as much information by only taking notes. Jacobsen (2002) also stresses that recording an interview is the most accurate way of register data. Interviews can be classified by their degree of standardisation (Lundahl & Skärvad, 1999). A high degree of standardisation implies that both the questions as well as the order of the questions are decided in advance (ibid). All our questions, as well as their order, were decided in advance and all companies were asked the same questions. This gives our interview a high degree of standardisation. However, Lundahl and Skärvad (1999) continue by explaining that in order to keep a high degree of standardisation it is important that each interview is conducted in the same manner, i.e. the same questions will be asked in the same order. Even though we had the exact same questionnaire for all the interviews, the order of the questions changed in the different interviews due to the fact that we asked follow up questions that sometimes lead us in to other questions than the intended question on the questionnaire. Lundahl and Skärvad (1999) name this type of interview as semi-standardised, which is therefore the
~ 12 ~
most suited term for the types of interviews we performed. A non-standardised interview implies a greater freedom in the type of questions used as well as their order (ibid). We chose not to transcribe the interviews word by word since we considered this task to be too time consuming. However, after the interviews we both listened through the interviews and made thorough notes on those parts of the discussions that were of interest to us. If there were parts of the interviews that were unclear or not fully developed, we contacted the respondents again for further explanation. 2.3.2 Analysing the findings Qualitative data analysis can be, according to Miles and Huberman (1994) in Amaratunga et al (2002), divided in three simultaneous activities: data reduction, data display and conclusion drawing and verifying. The first activity entails selecting, focusing, simplifying and transforming the collected material and occurs continuously during the research. The creation and use of the way in which the data is displayed, can facilitate the analysis. The last activity, conclusion drawing and verifying, cannot be finalised until the entire material has been collected. Miles and Huberman (1994) in Amaratunga et al (2002) present these three activities together with the data collection process as a interactive, cyclical process as seen in figure 2.1 below.
Data collection
Data display
Data reduction
Conclusions: Drawing/ verifying
Figure 2.1 Components of data analysis: an interactive model Source: Amaratunga et al (2002), p.28
Our opinion is that this model presents a fair view of our process of analysing the empirical findings in combination with the theoretical material. The analysis
~ 13 ~
in the last chapter is therefore the result of this cyclic process, which was ongoing during the whole of this thesis.
2.4 Criticism of Our Chosen Paths
Even though we are not positivists, there are a few concepts from this scientific approach that we found were relevant for this type of study, i.e. validity, reliability and generalisation. 2.4.1 Validity Validity is defined by Arbnor and Bjerke (1997) as “…the absence of systematic bias.” 5 . Gummeson (2000) offers a slightly extended definition saying that validity is “…the extent to which researchers are able to use their method to study what they had sought to study…”6. A qualitative study captures the sought out area of interests and is, according to us, the best suited approach that renders possible an understanding of the internationalisation process of manufacturing companies in a network based world, which is necessary in order to be able to identify how the construction of the supplier network is influenced. Befring (1994) states that it is possible to increase the validity by allowing the respondent to express herself/himself in the most comfortable way; which is in our opinion achieved through interviews. Validity is usually divided along two dimensions: internal and external (Eriksson & Wiederheim-Paul, 2001). Internal validity, sometimes also referred to as relevance, is related to the relationship between a study and existing theory within the area (Arbnor & Bjerke, 1997), while external validity measures whether the gathered information is compatible to reality (Eriksson & Wiederheim-Paul, 2001). For us, the internal validity will be most important, since we have used the combination of two different theories within separate areas to shed light on a practical phenomenon. By depicting a practical situation, we have showed the relevance of combining internationalisation theories and supply chain management. Whether we have managed to attain external validity is difficult for us to say. However, all three companies provided us with extensive information and, in our opinion, relevant information. We have therefore no reason to believe that any of our respondents answered untruthfully or deliberately withheld information. Consequently, we are convinced that the material received represents adequate description of how each company experiences its situation.
5 6
p. 233 p. 91
~ 14 ~
2.4.2 Reliability Reliability is about presenting a true and fair view, which can easily be controlled by doubling or repeating the measurements (Arbnor & Bjerke, 1997). In other words, for a study to have a high degree of reliability, similar results should be obtained if the research was conducted again. When using qualitative methods, the reliability issue can be problematic since the interpretation and analysis might be influenced by the researcher. To ensure the reliability of our study, we undertook certain measures such as: both of us were present during the interviews; we used standardised questions; and we conducted the interviews in a calm environment with sufficient time to our disposal (C.f. Kvale 1997; Patel & Davidson, 2003). What can be discussed, however, is how we have interpreted and handled the information received from our respondents. In order to strengthen the reliability, we returned the empirical part of the thesis to the respondents, so they could inform us if there were parts that we had misunderstood. We received responses from all informants, which not only increases the reliability of the empirical material but also diminishes our influence on the empirical findings. 2.4.3 Generalisation The scientific significance of case studies is often questioned arguing the difficulty in making generalisations from the results (Lukka, 1995). Furthermore, case researchers themselves are modest and usually claim that results based on case studies should be regarded somewhat cautiously since they only apply to the studied case (ibid). We do agree to some extent with the critics and our opinion is that our study cannot alone be used and generalised to all other global corporations with large parts of the value chain outsourced. We look upon our research as a piece in a puzzle and believe that our study, interwoven with other research, can bring forth a better understanding of the studied phenomena. Lukka, (1995) states that “…generalizations always presuppose that the future structurally corresponds to the past.” 7 , which is another argument that we believe should be taken into consideration, seeing that today’s business environment is changing fast and what seems to be the reality of today might not be the reality of tomorrow. This is particularly true for the business environment in emerging markets, where the market development is influencing corporations all over the world.
7
p.73
~ 15 ~
2.4.4 Criticisms of Sources To increase the credibility of a study, it is important to critically examine the resources (Befring, 1994). The author continues explaining that credibility is closely related to the concepts of validity and reliability, when the research is based on empirical data. The point of having a section with criticism of the sources, is to underline the significance and relevance of the sources for our research. As already mentioned, our primary data is collected via interviews and we believe that the information received was relevant considering the respondents’ position and experience. Furthermore, the fact that we interviewed several persons from each company gave us both broader and in certain areas more precise information. In our search for secondary data, we have used the university library database. We have only utilized Internet sources when searching for company specific information. The information gathered via the companies’ sites were later confirmed during the interviews. In the selection of printed sources, we have paid extra attention to find information that appeared reliable. According to Jacobsen (2002), the quality of a source is depending on the knowledge and competence the author possesses and source should be used individually. In order to get the best picture of a phenomenon, the researcher should always use at least two sources complementing each other, which is something we have strived for throughout the whole thesis. Befring (1994) suggests that it is also important to have in mind the year the article or book was written as well as the purpose. We have therefore aimed to use well-known authors within the area of interest, which in certain aspects lead us towards books published several decades ago. Even though some of the books used in this thesis are rather old, the sheer age of them does not imply that they are inaccurate.
~ 16 ~
3 The Internationalisation Process in Theory
~
“The strategies of modern multinational corporations are no longer shaped and conditioned by reasons of state but, rather, by the desire and - the need - to serve attractive markets wherever they exist and to tap attractive pools of resources wherever they sit.” Ohmae, 1995 (p. 3) This statement highlights the importance of a global presence, not only to serve markets, but also to be able to reach sought after resources in order to stay profitable. Consequently, in global business assembly plants or manufacturing facilities are spread over a wide geographic area, which means that materials and components are usually procured from more than one country (Christopher, 1998). The advantage of outsourcing is that complementary knowledge is brought into the company by external actors (Håkansson et al, 1993). When a company has certain activities outsourced it is important, according to Håkansson et al (1993), to facilitate the integration of the activities that take place outside the company with the ones within the company. Usually a company lets a supplier develop certain systems 8 or components, while they keep the development of key systems or components themselves. The current trend, explained by Christopher (1998), implies that global firms will dominate most markets and the role of national companies will be to serve unique local demands. For global players, the management of the logistics process has therefore become essential and the difference between success and failure is dependent on the companies’ ability to optimize the global pipeline. Logistics can now be seen as a source of competitive advantage, according to Greis et al (1999). The answer to the first research question will give an understanding of the internationalisation process of manufacturing companies, when a large part of the value-adding chain is outsourced. Therefore the first section of this chapter is structured as follows: first there is a short explanation of the term supply chain and strategic network which is followed by a passage of internationalisation aspects such as the purpose of going abroad, internationalisation process and internationalisation from a network perspective. This section is concluded by a short definition of an emerging market. The second part of this chapter holds a presentation of the paradoxes that were
8
A supplier that produces a compete system is referred to as system supplier
~ 17 ~
identified in our bachelor thesis as factors influencing the construction of a supplier network.
3.1 Supply Chain or Strategic Network?
Traditionally, companies have worked independently, only focusing on their own business in order to beat the competition (Christopher, 1998). As mentioned in the introduction chapter, companies are now becoming more dependent on their suppliers due to increased outsourcing. This creates a shift in the way companies are governed; large benefits can now be gained by cooperating within the supply chain (Christopher, 1998). The author continues explaining that the idea of cooperating with the suppliers is termed supply chain management where the focus is on the management of relationships. A successful supply chain management strategy results in profits for all involved parties, however in order to achieve this, trust is essential. Another important issue for companies is to not be too ‘self-centred’ and to think in terms of benefits for the entire supply chain. No benefits can be gained by transferring cost within the supply chain, because in the long run the end user will pay all costs. Opportunist behaviour only renders the supply chain ineffective and cost reductions should not be at the expense of other members in the network. Aitken (1998) in Christopher (1998) defines a supply chain as: “A network of connected and interdependent organisations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users.” Christopher, 1998 (p.19) Thus a supply chain can be seen as a network, as illustrated in figure 3.1 below. Although since this type of network is coupled with business activities it should, according to Forsgren and Johanson (1992), be classified as a business network in order to separate it from other types of networks, such as social networks. However, an additional distinction must be made between different types of business networks. The business network emerges over time through interaction between several autonomous actors (Forsgren & Johanson, 1992), which is not the case regarding the supply chain type of network. A supply chain network is intentionally created in order to achieve a profitable outcome for all parties in the chain (Christopher, 1998). A network that is deliberately created in order to fulfil a certain purpose is a strategic network, according to Klint & Sjöberg (2003). Consequently, supply chain or strategic networks can be used regarding
~ 18 ~
the same phenomenon and during this thesis the two terms will be used alternatively.
Figure 3.1 The Supply Chain as a Network Source: Christopher (1998), p.18
3.1.1 Managing the Supply Chain as a Network The buying firm is at the centre of an interdependent network of suppliers (Christopher, 1998). The author continues by explaining that this composition of companies is based on matching capabilities and competences among companies. Through relationships between companies and organisations, activities are organised in certain patterns (Håkansson et al, 1993). The patterns are not static and are constantly changing, influenced by the actions of the firms involved. The business activities of a single company are adjusted to fit this pattern (ibid). Christopher (1998) claims that in order to manage such a structure, there is a requirement for different skills and priorities compared to those needed traditionally, when companies competed on firm to firm basis. A manufacturing company is in need of a strategic coordination in their network of production facilities (Prahalad & Doz, 1987). When the competition is between supply chains, focusing on internal processes and the management of the network is essential, in order to achieve market leadership (Christopher, 1998). The author presents three significant challenges facing companies in this new competitive situation. Firstly, there is a much greater need for a higher level of joint strategy development. This implies that the members of the network must collectively form strategic goals for the network. Secondly, there is a requirement for the members of the network to stop thinking in terms of selfinterest and take on a more holistic approach. Thirdly, in order to make the network function to its fullest potential, a transparency and visibility of relevant information all through the network is necessary. Open-book accounting is an example of transparency, where cost data is shared and each member’s profit is visible to the others.
~ 19 ~
Every business network is a product of its history and Håkansson et al (1993), point out that time has in recent years increased in importance as a strategic factor. The authors demonstrate the time factor with an example: development is dependent on time since it, in a network situation, usually takes place as interplay between two actors. When the development takes place through interaction with outside parties, certain coordination between the units is necessary. The choice of the external parties is crucial and it is important that the other parties are interested in building and sustaining close relationships. The development process will in a certain aspect be dependent on how well a company manages its surrounding network. Networks in general can be characterized by the strength of connections or ties among the involved members (Mohrman et al, 2003). Strong ties, also sometimes referred to as a strong network, imply higher quantity, quality and frequency of interaction, while weak ties, i.e. a weak network, facilitate exchange among a larger number of members and allow groups to concentrate on general goals (ibid).
3.2 Purpose of going abroad
We believe that the purpose of going into a new market will influence the way a company chooses to construct their organisation. Supplying only the new market, as opposed to the entire world, should suggest different strategies and constructions of the supply chain. 3.2.1 Market Seeker In the market seeker strategy, a company decides to enter a foreign market with the primary goal to expand their sales (Cardone-Riportella et al, 2003). The authors continue by explaining that the selection of the market is based on which country holds the best economic potentials. As markets mature, the companies that favour this strategy move on to new markets (ibid). Daniels et al (2004) state that sometimes companies are forced to enter a market in order to serve it. This happens, for example, when transportation costs are high, when the products need to be adapted to local requirements or when there are trade restrictions such as high import tariffs. Therefore, these companies are also classified as market seekers.
~ 20 ~
3.2.2 Resource Seeker Daniels et al (2004) explain that a resource seeking company enters a foreign market in search for resources that are not available on the domestic market or resources that might reduce their production costs. The resources can be parts and components as well as intangible resources such as technological know-how and information. Some companies set up production abroad to profit from lowwage labour. The resources can enable a company to improve the quality and the possibility to differentiate from competitors; which in the end may lead to a larger market share as well as increased profits. 3.2.3 Minimizing the Risks Following the customers to secure the business and preserve the business relationship is a common motive for entering a new market (Gattorna & Walters, 1996). Johanson et al (2002) explain that this strategy is most often used by companies that sell their products or services to other companies. The customers may already be foreign or have a well established foreign trade. This implies that information about the foreign market can be submitted to the company in a secure manner, which will facilitate the internationalisation process. The initiative can be either an invitation from a customer to join an existing network or a demand, where the supplier would lose the business on the home market unless they follow. The benefit of this strategy is that the suppliers already have some information about the market, which decreases the costs as well as the risks. The strategy is often found in the automotive industry and durable industries (Gattorna & Walters, 1996). Within oligopolistic industries, FDI in a certain country made by one actor is soon followed by others (Daniels et al, 2004). These companies tend to have a significant amount of knowledge about internationalisation and they are also quite often a part of international networks (Johanson et al, 2002). By the establishment in many markets, companies can obtain economies of scale and therefore reduce costs (ibid). Johanson et al (2002) named this strategy “follow the leader”, while Daniels et al (2004), simply call it a strategy to prevent competitors’ advantage.
~ 21 ~
3.3 Internationalisation Process
The internationalisation process is explained by Johanson and Vahlne (1977) as “…the process in which the firm gradually increases their international involvement. “9. Forsgren and Johanson (1992) further explain this procedure as a growth process resulting from an interplay between a knowledge development process and a commitment process. Johanson et al (2002), describe the establishment chain, which explains the phases a company normally goes through when entering a new market: Export Æ independent representative (agent) Æ sales subsidiary Æ production According to Johanson et al (2002) the largest obstacle for companies, prior to taking the next step is normally that they have limited knowledge. The completion of every step brings new knowledge to the company, which makes the next step in the establishment chain possible (ibid). Commitments to markets are usually performed in small increments, unless the company has large resources and/or if the market conditions are homogenous (Johanson & Vahlne, 1977). The knowledge gained from one market facilitates the establishment process in other markets, which explains why big international companies can systematically set up operations in different markets (Johanson et al, 2002). The theory of successive internationalisation has received some criticisms, among others by Reid (1983) in Johansson and Mattson (1988), who claims that this model is too general and deterministic. The choice of entry mode is context specific and can be explained by resource patterns and market opportunities (ibid). Johanson and Mattson (1988) believe that: “…the internationalisation model is less valid in situations in which both the market and the firm are highly internationalised.” Johanson & Mattson, 1988 (p.210) This remark illustrate that the internationalisation theory by Johanson and Vahlne (1977), is not relevant for this thesis since the companies included in the study already are highly internationalised. However, it provides a necessary understanding to what these companies have undergone in order to reach their current position. The theory will also serve as an aid in the final part of the
9
p. 23
~ 22 ~
thesis, where we will discuss how this ‘old’ theory can be adjusted to present conditions. 3.3.1 Internationalisation from a Network Perspective When companies today are organised as networks, the issue of entering a new market has two distinct features: entering a new network and bringing parts or the entire old supplier network into a new market. A search through literature regarding this phenomenon revealed extensive literature about entering a new network but scarce information about how to bring suppliers into a new market. The internationalisation process from a network perspective is portrayed in the literature from a rather general point of view. It is described by Forsgren and Johanson (1992), as a process when a company makes investments in relationships with customers, suppliers and competitors in a foreign market. The goals are to establish, defend or develop positions in foreign networks (ibid). A position in a network is established by historical actions and is continuously changing through the interaction process (Forsgren & Johanson, 1992). Easton (1992) explains that a change of position of one company will effect the positions of the surrounding firms and may even cause a cascade of changes throughout the entire network. Some firms that have achieved a preferred position may defend it with all means possible (ibid). A new company always signifies a threat to the actors in the network; especially large companies can expect resistance when they are trying to gain a new position (Håkansson et al, 1993). Small companies can be viewed as complements and will therefore not be met with the same resistance (ibid). Forsgren and Johanson (1992) assert it can be difficult for a newcomer to enter a network of stable relationships. When buying companies and their suppliers invest in their business relationships in terms of technical and commercial adaptation, it creates strong ties between the involved parties and for that reason, breaking a business relationship can entail high costs (Hallén, 1992). Although, according to Seyed-Mohamed and Bolte (1992), a company that controls a unique resource has an advantage and can strengthen its exiting relationships or initiate new relationships with others that seek access to that unique resource. According to Forsgren and Johanson (1992), the process of entering a foreign market is about trying to understand the network, timing activities regarding different relationships and responding to actions taken by actors in the network. The international strategy is therefore a matter of adapting to the existing business network structure rather than strategic decisions taken by top management (Forsgren & Johanson, 1992). Since networks usually are of a quite complex character, the most suitable way of
~ 23 ~
entering a foreign market is determined by the characteristics of the network and not by an individual firm (Seyed-Mohamed & Bolte, 1992). Johanson and Mattson (1988) suggest that entering a network is done by building relationships that are new to the company and its counterparts; either by breaking old relationships or by adding new to the already existing ones. The industrial network approach suggest that entering a foreign network can be achieved through: international extension, which means establishing new positions in relation to counterparts in national nets; penetration i.e. developing and increasing resource commitments in already established positions in foreign nets and international integration, where positions in different national nets are coordinated (Johanson & Mattson, 1988). Håkansson et al (1993) offer two alternative strategies of entering a network: successively or ‘big bang’. The former case implies starting in the peripheral of the network and then slowly becoming a more central actor. No actor moves in the network in the literary sense of the word; it is more of a slow restructuring process where one company’s position becomes more central. This strategy is time-consuming and could imply difficulties in a competitive environment. The latter strategy, the big bang, is about reaching a central position quickly by restructuring the network. This can be achieved by, for example, buying a central actor. The cons with this strategy are that it requires a unique product or a solid economic base to ensure the survival of the business activities. Another difficulty for the company is to attain the accurate information about the network before they are actively involved (Håkansson et al, 1993). The difficult task of gathering information about a foreign network is one of three critical issues a company must take into consideration when entering a network abroad (Axelsson & Johanson, 1992). The only way to obtain such information is, according to the authors, to interact with actors in the network. The other two critical issues, presented by Axelsson and Johansson (1992), are positioning and timing. Positioning is when resources are invested in business relationships and an actor thereby establishes a position in the network. Positions in, for example, domestic or third world markets can function as a stepping stone into a targeted market. Since networks are constantly changing through interactions between actors in the network, business opportunities will appear randomly. Timing is about quickly identifying opportunities and act on them. This last issue cannot be planned or prepared for in advance which further advocates the importance of presence in different networks. The closer an actor is to a network the more probable it is that the actor will be exposed to emerging business opportunities.
~ 24 ~
3.3.2 Emerging Markets There is no generally accepted definition of the term emerging market, although the term is frequently used in business literature (Rahman & Bhattacharyya, 2003). Less developed countries, newly industrialised and third world countries have all been referred to as emerging markets (ibid). Rahman and Bhattacharyya (2003) define an emerging market as: - A market that shows a promise of substantial economic growth in the future. - A recent opened economy for foreign direct investment, with a trade liberalisation process that will continue in the future. - A market with an institutional infrastructure to facilitate marketing transactions. Although, this infrastructure compared to one found in a developed country is less effective.
3.4 The Paradoxes
We have chosen to present the second part of our theoretical findings structured after three paradoxes: High vs. Low Involvement, Concentration vs. Dispersion and Control vs. Autonomy. The first paradox concerns the relationship with the suppliers, the second concerns the location of suppliers and the last one deals with the HQ’s control over production plants. These paradoxes were identified in our bachelor thesis, as issues companies must deal with when constructing a supplier network on a foreign market (in our case, the foreign market was China). In the thesis we found that the relationships between the customer and supplier influence the international actions of the companies. The theoretical findings divided this relationship in high and low involvement which portray two possible opposites of a relationship. It is more or less impossible to have a high and low involvement relationship with one supplier at the same time thus a company must always choose between these two. The most suitable way, according to us, is to present this choice as a paradox. Thereafter we examined the other factors that we had identified earlier, to see if these could be presented as paradoxes as well. The result was that we could add Concentration vs. Dispersion and Control vs. Autonomy to our High vs. Low Involvement paradox, ending up with three paradoxes. To facilitate the understanding of how the supplier structure is influenced by the paradoxes, we have constructed a model which easily portrays the supplier structure (see figure 3.2). Setting up production overseas implies using a mix of local suppliers and imports. The first step is to see how much the company
~ 25 ~
needs to import and how much they can buy from the local market. The degree of imports is depicted by the x-axis. The material and components that can be procured locally can originate from local domestic suppliers or foreign suppliers with their own production in the country. This puts local domestic suppliers in direct competition with foreign suppliers, indicating that these two factors are correlated. The more local suppliers a company uses, the less foreign suppliers are included in the final supplier network. The y-axis shows the degree of local suppliers where 100% local suppliers indicate 0 % foreign suppliers and vice versa. In the model, an example is given by the black dot. The position of the dot implies that 50% of the parts and components are imported. Of the remaining 50%, roughly 75% is bought from local domestic suppliers and 25% bought from foreign suppliers. This model will be used to portray how the paradoxes influence the supplier structure.
Local domestic suppliers
50 %
Foreign suppliers 50 %
Import
Figure 3.2 Supplier Network Structure
3.4.1 High vs. Low Involvement The business relationships a buying company has with its suppliers can range from close interpersonal contacts, where joint product development is performed, to keeping the supplier at arm’s length away, where a customer specification is the only contact (C.f. Christopher, 1998; Gadde & Håkansson, 2001). In our bachelor thesis we found that in the former case, the technology of the company, is the determining factor and the level of involvement with the suppliers is high, whilst in the latter case the volume aspect is more important and the level of involvement is kept to a minimum. In order for a buying company to develop and maintain effective supply strategies, they need to understand the economic consequences of their supplier relationships and be conscious of the possible
~ 26 ~
effects of changes in the level of involvement (Gadde & Håkansson, 2001). Gadde and Håkansson (2001) classify the supplier relationships in two categories: high- and low involvement. High involvement makes it possible for the buying firm to utilize the suppliers’ skills and capabilities in order to improve their own products and services. By working closely together, it is feasible to attain reduced costs by improving production processes and material flows. Christopher (1998), also discusses the benefits of working closely together with the suppliers, however the author names this type of relationship as ‘co-makership’. A close cooperation, according to Gadde and Håkansson (2001), entails significant costs in adaptation, co-ordination and interaction. As production processes become linked between companies the investments in the relationship, i.e. the created mutual dependency, can function as a barrier for competitors (Christopher, 1998). The cost of changing supplier increases as the companies invest more in their relationship (Hallén, 1992). Gadde and Håkansson (2001) continue their reasoning by saying that a high involvement relationship is only possible when there is a similar interest from the supplier, since this type of relationship imposes costs on the supplier as well. Therefore, the buying firm needs to motivate and encourage the supplier. A disadvantage with the high involvement relationship is that it is very time-consuming to develop. Buyer and seller need to know a lot about each other before the relationship will start; trust and commitment are essential. There is a tendency that companies are reducing their supply base; buying companies strive for long-term relationships with fewer suppliers (Christopher, 1998). According to the author, the future successful companies will be those who launch strategies based on closer relationships with key accounts. Gadde and Snehota (2000) support the idea of making partnerships with a few selected suppliers, since this type of relationship is resource intensive and can only be managed with a limited number of suppliers. The low involvement approach, described by Gadde and Håkansson (2001), is sometimes referred to as keeping the suppliers’ at arm’s length away, is about avoiding dependency on suppliers. Firstly, being dependent on only one supplier increases the uncertainty whether or not the supplier will be able to fulfil their responsibilities. Increasing the number of suppliers decreases this uncertainty. Secondly, by having a number of suppliers, a company can avoid being locked into a specific relationship. Two companies may develop in different directions and if they are closely connected this can create a problem. Thirdly, a company
~ 27 ~
with many suppliers can create competition among the suppliers with the purpose to get lower prices. When dealing with low involvement relationships little adaptation, co-ordination and interaction are needed, which gives this type of relationship the advantage of a low relationship handling cost10. On the other hand, switching suppliers can increase some of the costs, as well as making routinisation difficult. Dealing with many different suppliers may also raise the supply handling costs 11 . The low involvement strategy therefore gives a company the freedom to choose the ‘best’ supplier but it also puts some constraints on the type of product produced. A low involvement means standardised products and little adaptation possibilities. This type of relationship does not necessarily mean it is on a short term basis; a company can manage a low involvement relationship successfully on a long term basis. A high involvement relationship is appropriate when benefits can be gained by using the combined knowledge of the supplier and the buying company. For MNCs that are moving production into low cost countries, this should suggest favouring foreign suppliers or imports as shown by the dashed arrows in figure 3.3. A high involvement relationship takes time to develop and by using imports or foreign suppliers, the old relationship can continue in the new market. As long as the local domestic suppliers do not have disadvantages regarding knowledge and technical skills vis-à-vis the foreign suppliers, there is no reason that a MNC cannot start a high involvement relationship with domestic suppliers. However, in the initial phase of the internationalisation process this is unlikely, seeing that the high involvement relationship takes a long time to develop. The low involvement relationships are more suited for simpler parts and components and since it is driven foremost by cost, such a relationship can be established in a short period of time. Therefore the foreign suppliers and the local domestic suppliers can compete on more equal terms, which would suggest a movement along the black arrow in figure 3.3. The empirical findings in our previous bachelor thesis implied that local domestic suppliers often had a better cost structure than the foreign suppliers, which would increase the effect of the black arrow.
10
Relationship handling cost: cost dependent on the extent of the involvement with the supplier e.g. adaptation costs (Gadde & Håkansson, 2001) 11 Supply handling cost: structural costs for the whole purchasing organisation (ibid)
~ 28 ~
Local domestic suppliers Low involvement
50 % High involvement Foreign suppliers 50 % Figure 3.3 High and Low Involvement Effects Import
3.4.2 Concentration vs. Dispersion As mentioned in the introduction to this chapter, global companies now source on a worldwide basis to supply their global production. The strategy of a global company is explained by Christopher (1998) as trying to extend market presence and at the same time trying to achieve cost reductions through economies of scale. However, the task of supplying markets world wide through a few production bases, is a rather complex undertaking (ibid). Zsidisin et al (2000) claim that even though outsourcing has provided companies with a competitive advantage in the market place, it has also entailed an increase in the degree of exposure to risks throughout the pipeline Concentration or dispersion concerns, within the frame of our study, the location of the suppliers. Is it equally important to have the suppliers physically nearby, when communication across the globe has improved significantly? Despite the development of cheap and fast communications that has decreased the importance of geographic distance; it has not erased the significance of locations completely (Castells 1996; Kelly, 1999). MNCs will for the most part, keep their strategic command centres in, what they historically define, as their home nations (Castells, 1996). Certain phenomena, like for example sports events, will always be locked to a specific location (Kelly, 1999). In terms of business, meetings face to face will facilitate certain activities, in particular activities such as product development because of “…the nature of the interaction in the innovation process”12 (Castells, 1996). A purchasing company, according to Zsidisin et al (2000), must have confidence in the suppliers’ capacities to develop and stay efficient in their production processes. If both the
12
p. 390
~ 29 ~
buying company and the supplier are in the same geographic area, the buying company can easily visit the supplier to make sure they fulfil their requirements. Although, meetings in certain locations will limit the amount of possible connections that can be made, e.g. a person in a certain location can only interact with a restricted amount of people in the vicinity (Kelly, 1999). However, with the technological development, a great deal of the economic activities has moved into, what Kelly (1999) refers to as ‘space’. This space has, in contrast to a location, unlimited possibilities of potential connections. In space communication can connect nodes, dimensions, relationships and interactions in virtual networks in spite of their physical location. To come in contact with new suppliers is thus easier with this new technology. To sum up the thoughts of Castells (1996) and Kelly (1999), certain activities are bounded and necessary to be performed face-to-face in certain locations, while other activities are easily transferred to the ‘economic space’. Christopher (1998) claims that large corporations are often too concentrated on cost reductions to realize that the cost of longer pipelines may outweigh the savings gained from the cost reduction. Even if a supplier guarantees quality, the cargo can be damaged during transport (Zsidisin et al, 2000) and the longer the transportation the greater the risk of damage. Regarding the location of suppliers, Andersson (2000) claims that the type of offer, i.e. product or service and the complexity in the customer relationship, influence the international behaviour of the supplier. The more complex a relationship is, the more advantageous it is for the supplier to be near the customer, both geographically and physically. The theoretical findings stress, that suppliers that have production near their largest customers, as the best solution. However, in practice it is probably not possible to be physically close to all major customers. In figure 3.4, the concentration effect would decrease the amount of imports needed, while the dispersion effect would cause the opposite result.
~ 30 ~
Local domestic suppliers
50 % Dispersion Effect
Concentration Concentration Effect Effect
Foreign suppliers
Import 50 % Figure 3.4 Concentration and Dispersion Effects
3.4.3 Control vs. Autonomy Control vs. Autonomy concerns the independence of the production and assembly plants vis-à-vis the HQs. It is about organising the resources of the entire corporation across country borders. Some of the theories presented in this section are written from a logistic perspective. Even if logistics is not our main focus, it is a wide conception and since coordination of suppliers is a part of logistic issues, we have included these theoretical approaches in the thesis. When companies enlarge their supply chains internationally, they have to face the issue of structuring their global operations. Christopher (1998) discusses where in the organisation the decision-making responsibility should be placed. Conventional knowledge implies that this type of responsibility ought to be placed on the strategic business unit (SBU). Companies that have delegated power to the SBUs, usually also have a strong local management with an autonomous decision-making division in each country. This approach is ineffective when global strategies are required, however it may stimulate local initiatives. In order to reach a balance of global and local decision-making, Christopher (1998) points out that a number of general principles have emerged. • Global coordination is increasing in importance when companies only focus on their core competences13 and outsource the remaining activities. In order to manage and control the extensive supplier network, there is a need for local and central participation. Christopher’s (1998) opinion is that decisions regarding strategic issues should be taken at the HQ, while the
13
Christopher (1998) defines a core competence as a distinctive advantage
~ 31 ~
supervision and management of supplier actions ought to be managed locally. • In order to achieve trade-offs by moving divisions such as production and distributions across national boarders, companies need a central decisionmaking structure for logistics to succeed. Ridged local systems can impede the companies’ objective of global optimization. However, if successful, a firm can attain cost minimization and service maximization. • Since no markets are exactly the same, benefits can be gained by adapting marketing strategies to local characteristics. Especially customer service management 14 , where there is a possibility for tailoring according to individual customer needs. Even though customer service management is moving towards becoming more globally and centrally managed, a certain local adaptation will always be necessary. The opinion of Doz (1986), regarding the control or autonomy of subsidiaries located in foreign markets, is that decisions concerning the expansion or contraction of the network are of a rather difficult character. Those types of decisions can only be made by taking their effects on the entire network into consideration; hence they cannot be delegated to local management. The author continues by explaining that decisions regarding transnational investments are usually quite risky and uncertain. In order to prepare such a decision, several functions are often involved. Besides manufacturing and plant engineering specialists, divisions such as purchasing and finance need to be consulted. Specific choices are then taken by top management, which results in a centralized investment decision function in a majority of network enterprises.
14
Management of the entire order fulfilment process i.e. from order to delivery (Christopher, 1998)
~ 32 ~
Prahalad and Doz (1987) present a table, which offers an easy overview over factors that enhance and impede the HQ’s control over subsidiary operations. Factors Enhancing HQ’s Capability to Control Subsidiaries - Dependency of the subsidiary on resources of HQ: technology, management, export markets, finances - Share strategic vision and competitive strategy - Systems that recognise contributions to global strategy - Loyalty to MNC Factors Impeding HQ’s Capability to Control Subsidiaries - Historical evolution of HQ – subsidiary relationship: extent of autonomy of subsidiary - Host government regulations - Presence of joint venture partners - Loyalty to country, host government policies
Table 3.1 Control over Subsidiary Operations in a MNC Source: Prahalad & Doz (1987) p. 166
As mentioned earlier, when dealing with a global pipeline, it is crucial that the organisation finds the correct balance between central and local management (C.f. Christopher, 1998). In an organisation with a strong control from the HQ, the choice of suppliers in a foreign market should result in foreign suppliers or imports. In the initial phase of an establishment, the HQ ought to be more inclined to use already established and stable relationships, i.e. high involvement relationships, with foreign suppliers or continue importing. This is the quickest way of starting up production, since finding new suppliers and evaluate them is time-consuming. This movement is represented by the dashed arrows in figure 3.5. The more autonomy a production plant is given, the more local suppliers are likely to be possible to incorporate, seeing that the local plant has a better insight on the selection of available suppliers and the technological development on the local market.
~ 33 ~
Local domestic suppliers Autonomy Effect
50 % Control Effects Import 50 %
Foreign suppliers
Figure 3.5 Autonomy and Control Effects
~ 34 ~
4 Internationalisation Process in Practice – The Path of Three Companies
~
This chapter starts with a presentation of the interviewees and the companies and a short explanation of the tier-structure. Thereafter internationalisation aspects and the paradoxes will follow, repeating the structure from the previous chapter. In every section of this chapter, each company is presented separately in the following order: Ericsson, Scania and VTC.
4.1 Presentation of the Interviewees and the Companies
Ericsson Anna Ahnfalk Thomas Andersson Scania Volvo Truck Corporation Marianne Pettersson Olle Wengelin Alf Karlsson Lennart Carlsson Tryggve Kristenson Manager Electromechanics Group Function Sourcing Manager Electronic Manufacturing Services Group Function Sourcing Process Engineer Purchasing Purchasing Manager Supplier Improvement Coordinator International Manufacturing Director Business Strategy Manager
Table 4.1 Presentation of Interviewees
Global Presence Ericsson Scania Volvo Truck Corporation Presence: 140 countries Production: 3 countries Presence: 100 countries Production: 5 countries Presence: 130 countries Production: 12 countries
Outsourced activities15 85 % 50 % 75 %
Product Systems Trucks Trucks
Location of HQ Stockholm Södertälje Gothenburg
Table 4.2 Company Presentation
15
Percentage of the value of the final product added by suppliers
~ 35 ~
4.2 Tier Structure
Tier structure is mentioned repeatedly in the interviews. In order to fully comprehend the empirical material, a short explanation of this term is needed. The suppliers are organised in tier-structures (see fig 4.1 below). The tierstructure of one customer can contain numerous tier levels depending on the product. The total number of suppliers usually increases in each descending tier level.
Customer Tier1 Tier2 Tier3 Figure 4.1 Tier Structure
4.3 Internationalisation Process
The aim of this section is to present how the internationalisation process is conducted in the selected companies. Ericsson Ericsson has used different internationalisation strategies for different parts of their businesses. In China, for example, they have constructed a new supplier structure for some components from scratch; while for other areas, they asked the current suppliers to join them in China. There were a few suppliers that did not follow Ericsson, since it was more profitable to fly or ship the products from Sweden instead of starting up new production in China. There are circumstances when the supplier had seen business potential in new markets and recommended Ericsson to join them. Ericsson explains that the whole supply structure is much more mature now than compared to 10 years ago. Today most of the suppliers have extensive experience from moving into and operating in foreign markets. Some of the suppliers are more globally present and have more experience of new markets than Ericsson.
~ 36 ~
Ericsson can request suppliers to follow them into a new market, but the suppliers are not forced to do so. However, certain suppliers are obliged by contractual agreements to help a local supplier to start producing their product in the selected market, by providing the new local supplier with resources and competence. The motive for this type of contract is that it provides an easy solution for Ericsson, when the supplier’s interest and their own are divergent. Ericsson explained that the suppliers often are counting on being present on those markets Ericsson find attractive and are therefore willing to take the risk of ensuring to supply Ericsson wherever they may start production. There has been a change in Eriksson’s supplier strategies regarding the establishment of suppliers in foreign markets. Ericsson used to be more involved in the internationalisation process of the suppliers. Now, they want the decision to move production, to be taken by the suppliers themselves, i.e. the supplier must see the potential as well as search for other customers to supply on the new market. Although, if the supplier possesses a unique competence or is a small company, Ericsson might still get involved in the decision of moving production. Ericsson has recently decided to start up a new supply base in India. The reason is similar to that of China: huge market potential and extreme price pressure. The first step will be to start a facility where parts and components are being sent in order to be assembled (final assembly). Ericsson gained valuable experiences in China and they believe that the starting up process will be faster in India. The decision to enter India should be prompted by the suppliers’ own business strategy. The establisment process in China was made in two steps: The first step was to bring old suppliers to China, followed by the the second step which was to find local chinese suppliers. In India it might be possible to take “a short-cut” and focus on local Indian suppliers in an earlier stage, within areas where there is no or little technical risk involved. Regarding the suppliers in tier 1, Ericsson will probably use the same ones as in China, however they will focus on finding more local Indian suppliers in lower levels of the tier-structure.
~ 37 ~
Scania When entering a new market Scania focus on two issues: 1. How quickly do we want the establishment process to be performed? 2. Are there any new suppliers on this market that have a better position than the current ones? The overall guide to answering these two questions is the type of product that is going to be produced. The first thing Scania considers is the current supplier structure. Sometimes the current supply chain is not “mature” enough to move into a new country or it is not realistic to ask the suppliers to move with them into the new market. Scania has several examples where they have “made” suppliers follow them into new markets. They see it as a negotiation process where there is: “ …threats and enticements by turns…”16 (Olle Wengelin, Scania) Basically it ends up with a “take it or leave it” offer, where the supplier probably views it as a threat, while Scania sees it more as a business opportunity offer. Since there is always a possibility to import articles and components in the beginning of an establishment, the second question does not need to be fully investigated before the production plant is up and running. Scania tries to focus on international suppliers and has therefore a well developed net of global suppliers. Due to this reason, an entry into a new market will not have any major effect on their overall supplier structure. The global presence of the suppliers makes it easy for them to start delivering into new markets. Starting a new production plant does not entail a large effort in finding new suppliers on the new market. Often there is a basic industry already established in the country, which can be used for basic parts and components. Scania’s most recent establishment was a bus production plant in Poland. The internationalisation process has been facilitated by the increased global presence of suppliers; however, nowadays there are more complex systems that need to be moved.
16
Own translation
~ 38 ~
Volvo Truck Corporation The reasons for establishing production abroad are the same today as 20 years ago: business potential. When business potential is identified in a country, the next step is to decide in what location the production facility would be most profitable. The choice is based on several things such as: logistics issues, the availability of competent personnel and the benefits that the authorities might offer foreign investors. The procedure of setting up a new factory is not itself complicated and within that area VTC has many years of experience. However, the problems vary depending on country conditions and governmental rules. The purpose behind the location of production facilities is based on two main factors: - Strategic reasons - “Must reasons” Strategic establishments are made in those parts of the world where there is a projected sustainable growth and where there is a potential for producing and selling large volumes. The closeness to a specific market is another reason for such an establishment. A strategic establishment is not only starting production and supplying a new market; in those locations VTC will build up an entire organisation, i.e. VTC will have functions such as procurement and an ITdivision locally. These kinds of establishments do not have the requirement to make an immediate profit, since it is a large-scale and long-term investment. These kinds of investments also usually entail high risks. Other investments, such as a completely knocked down (CKD) production facilities, are expected to generate profit within a year. CKD-production implies that more or less the entire vehicle is sent in parts as a package from Europe to an assembly facility abroad. The risks are lower since this way of working requires less investments and there is a possibility for a quick shut down of the production if, for example, market conditions changes. “Must reasons” to enter a new market is when VTC is forced by trade barriers to start production in a country, in order to be able to sell on that market. Such a barrier might be high tariffs for importing a complete vehicle or the demand for local content17. Suppliers that do not follow VTC with production into new markets are not necessarily replaced if they can deliver to the new factory at a reasonable price. This usually concerns smaller production facilities in less important markets.
17
Local content demand means that a certain percentage of the parts and components of a truck must originate from the local market i.e. produced within the country.
~ 39 ~
However, concerning strategic establishments, there is a demand for global suppliers to be present. VTC’s opinion is that if one of their global suppliers is not already present in one of their strategic markets, they should follow VTC into this market, trusting VTC’s assessment of business opportunities. So far, the suppliers themselves have seen the value of moving production near VTC and therefore it has not yet been a problem. In general, global suppliers are not in direct competition with local suppliers. However occasionally, for example in a market such as India where there is a demand for local content, small local suppliers can be used on the expense of a global European supplier. When entering a new market, the volumes are usually quite small and VTC can initially supply the new market by importing CKD-kits. Certain factors, such as cost positioning, high import tariffs or a local content demand from the host government, forces VTC to start buying locally soon after an establishment. For strategic establishments, having suppliers nearby is more important, since this type of establishment represents a large long-term investment with the goal of supplying either a large market or several markets. As mentioned above, there is more or less a requirement for VTC’s global suppliers to be in the geographic proximity of a strategic establishment. The locations of suppliers have not yet caused any problems for VTC. A CKD-assembly plant can, to a large extent, rely solely on imports and are therefore not dependent on suppliers nearby. China is VTC’s most recent strategic establishment. They started up with a CKD-production facility but at the same time they began the construction of the supplier network, building relationships with authorities, developing the procurement organisation etc. In South America, this procedure took about 10 years before it had reached its “full” potential. As for Asia, the next phase will be to start sourcing materials and finished products between the countries in the geographic area. Currently, it is only possible to source between the ten countries that are members of the free trade association, ASEAN (Association of Southeast Asian Nations)18. Today there is a flow of completely built up (CBU) units from Europe to Asia. However, VTC’s belief is that due to increased volumes and better cost-structures in Asia, this flow will turn around in the opposite direction, i.e. a flow from Asia to Europe, within a not too distant future. The initial flow might be components and material but will soon be followed by complete products.
18
The members are: Brunei, Burma (Myanmar), Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, Cambodia, Laos (source: Keegan, W & Green, M., 2000)
~ 40 ~
4.4 The Paradoxes
4.4.1 High vs. Low Involvement All three companies produce rather complicated products. Certain parts and components require the suppliers to have a high level of technological knowhow, while some are simple products that the buying companies order in large volumes. This paradox basically, as explained in the previous chapter, deals with the relationship a buying company has with its suppliers. The volume side represents a low involvement relationship, where the contacts usually are performed with an arm’s length distance. Regarding the more technology intensive parts, more efforts are put into the relationship, thus resulting in a high involvement from both sides. Ericsson Ericsson has roughly 100 suppliers in tier 1 and in total about 500. Approximately 85% of the produced value is deriving from the suppliers. In tier 1 there are 20 main suppliers that represent 90% of the value, the other 80 suppliers stand for the remaining 10%. These 80 suppliers produce products such as cables, screws, nuts and installation kits. Ericsson works mainly with suppliers in tier 1 and 2. Regarding standardised products and where there is sufficient competition among suppliers, there is less need for Ericsson to be involved in lower tier-levels. However, sometimes there are reasons such as severe competition and design issues to get involved in tier 3 as well, especially when the products are “Ericsson unique”. During the development stage of new products, there are some areas where the company can only work with a few selected suppliers, which can lead to a weak competition. Development performed in cooperation with suppliers that also supply competitors of Ericsson, usually only includes less advanced products. Today Ericsson mainly uses large global suppliers. The company started with rather small and “family owned” suppliers but during the years, many of these have been bought or merged with other suppliers, resulting in the global players that constitutes the current supplier structure. Ericsson’s requirements on their suppliers are for example: quality, environmental thinking, best price structure, flexibility, long-term commitment and “capable and competent”. Being “capable and competent” implies being able to participate in development projects as well as managing their sub-suppliers.
~ 41 ~
The relationship with the suppliers is usually on long-term basis and most of the suppliers in tier 1 are the same ones as five years ago. However, due to fierce competition, there is a strong focus on cost and the total cost is always the determining factor when choosing a supplier. Usually, the same supplier is used during the whole life-cycle of a product, since it is often too expensive to switch and because there is a risk involved in terms of quality assurance and supply. Ericsson has insight into the affairs of the majority of their suppliers and in most cases Ericsson negotiates prices and contracts with their suppliers’ subsuppliers, i.e. suppliers in tier 2. The result is that more than 80% of the product price is controlled directly by Ericsson. For the remaining share of the total price, there usually exists a cost model for how the price should be built up, normally provided by Ericsson. There is a limited number of suppliers that are irreplaceable due to design issues. However, these suppliers represent only a small value of the final product. The reason why these suppliers are still used, is because the design change needed, to be able to use an alternative source would cost more than paying the higher price that the current supplier is asking. Ericsson is focusing on their core business and extensive vertical integration is not a strategy applied by Ericsson since the outsourcing process of manufacturing is more or less finished. Today, Ericsson does not own any of their suppliers or sub-suppliers and the ambition is to decrease the total number of suppliers. However, within certain areas the number has increased in order to intensify competition or take advantage of new knowledge. Scania Scania has roughly 550 suppliers in tier 1; they have no exact estimation of how many suppliers they have in tier 2. In the past they owned some of their suppliers, however, this number has decreased during recent years. The suppliers add about 50% of the produced value and the goal is to focus the efforts towards the suppliers in tier 1. If possible, they try to avoid working with suppliers further down the tier-structure. Although, certain circumstances force Scania to get involved with the suppliers in tier 2 and lower, e.g. when an article or component has a significant effect on quality and therefore also could affect the perceived image of Scania. In the interview, Scania stressed the fact that the total cost always decides what supplier to use and where to produce. However, when asked about guidelines for selecting suppliers, cost appears as the fourth criterion.
~ 42 ~
1. Safety 2. Quality 3. Delivery
4. Cost 5. Time to market
After selecting a supplier, Scania uses a model in order to classify the relationship with the supplier.
Involvement
High Excellence in manufacturing Mature Labour Catalogue Low Low Figure 4.2 Scania's Supplier Categories Source: Scania Development
Joint Venture
Value added by supplier High
The demands of the suppliers increase successively, with little demand on the Catalogue suppliers to complicated requirements on the Joint Venture (JV) suppliers. The Catalogue supplier relationship, for example, is short and there is no requirement for technological leadership or global presence. For the Development or the JV-suppliers, the situation is the opposite, where global presence is mandatory and leadership in technology is required. These relationships are on a long-term basis with a recommended length of 3-5 years. The suppliers in the Catalogue ‘bubble’ are easy to switch, while a change of supplier in the Development and JV-bubble entails more difficulties. It is important for Scania to find the best supplier within each bubble and they work actively to encourage the suppliers to improve. However, Scania does not want the suppliers to switch bubbles; the goal is not, for example, to make a Labour supplier become a Development supplier. Scania wants the suppliers to stay and improve within their bubble; this movement is portrayed by the arrows in model 4.1.
~ 43 ~
High 80 % of total volume 20 % of total volume
Low
Impact on average material cost
Leverage Products Various suppliers. Represents a relatively large share of the average end product
Strategic Products A close and long term cooperation to obtain significant improvements in the areas of product development, quality and cost reduction is necessary. Will result in one supplier available Bottleneck products One supplier available. Represents a minor share of the cost of the average end product. High
Routine products Various suppliers. Represents a minor share of cost of the average end product.
Low
Commercial risk Figure 4.3 Scania's Matrix for Procurement Source: Scania
The model concerns tier 1 suppliers and Scania has certain recommendations depending on where in the model a supplier is positioned. When dealing with suppliers, Scania estimates the commercial risk. If it is possible to change a supplier within 2 years then the commercial risk is low, if it is impossible to switch within that timeframe the commercial risk is high. Scania strives for long relationships with their suppliers in order to reduce risk. When looking at a relationship with a supplier, Scania takes the annual volume of the article or component and multiply it with the price, which gives them a volume value. Then they place the supplier in the following matrix. The goal is to have several suppliers for each part or component in order to have the possibility to switch supplier if necessary. If a supplier ends up in the bottleneck position, Scania will work actively to try to either change the supplier or change the construction of the part or component. Scania will however always have their guidelines in mind and therefore they will always give priority to safety and quality before cost. Volvo Truck Corporation VTC has about 1 500 suppliers in Tier 1, an exact figure is difficult to present since the number of suppliers varies depending on the product. Approximately 75% of the produced value is outsourced. The selection of suppliers follows
~ 44 ~
certain criteria such as global presence and leadership in technology. The latter requirement is due to high development costs. By outsourcing some of the development of components, the cost is transferred from VTC to the suppliers. Since the suppliers normally have many customers demanding similar products they can divide the development cost on larger volumes. The length of the relationship is of importance and priority is given to suppliers with a long history of business with VTC. There is a strong environmental focus within VTC and suppliers that can fulfil VTC’s environmental demands are preferred. Another criterion is that the suppliers has to have other customers besides VTC, in order to spread the risks. The current trend is moving towards using system-suppliers to a larger extent, which implies using fewer suppliers who represent a larger value. The number of suppliers varies in the different product segments. In some areas where the products are more standardized, there is quite a large number of suppliers to choose between. In those segments the relationships are driven by cost and changing suppliers is only done if the cost differences are significant. Regarding certain more complex components there might only be one or a few suppliers available. In those cases, performance requirements are given priority and the supplier that can deliver the best performance is chosen and cost issues become secondary. Well-established long-term relationships are valuable since the automotive industry is a rather mature business and competition pushes the industry forward. VTC has a quite fixed supplier structure and changing suppliers is often not preferable. They favour ‘old’ suppliers, which are constantly being encouraged to improve their performance. Due to the competitive environment, the development procedure is today shorter, which pushes the cooperation to start already in the early development stage. The collaborations are therefore becoming more intense, and the relationships between VTC and their suppliers are, to a large extent changing, from being between VTC purchaser and the supplier, to being between VTC designer and supplier. A close cooperation with the suppliers entails the possibility to further investigate what sub-suppliers they use and having that knowledge, VTC can try to find further ways to cut costs. Previously, VTC owned some of their suppliers, i.e. some components were produced within the corporation. Nowadays, VTC is intensively working towards outsourcing parts of the business due to cost reasons. Buying components externally renders possible better price proposals and gives VTC the opportunity to choose the supplier with the best offer. However, essential
~ 45 ~
components will always be produced by VTC, in order to secure quality and take advantage of the knowledge within the corporation. 4.4.2 Concentration vs. Dispersion Concentration or dispersion concerns the location of the suppliers. Is it equally important to have the suppliers physically nearby, when communication across the globe has improved significantly? Ericsson Ericsson has production facilities in Sweden, China and Brazil and from these three productions bases they supply the entire world. However, Brazil is somewhat of an exception. Import tariffs and taxes forces Ericsson to produce in Brazil in order to supply that specific market. As of today it is not profitable to export from Brazil to other countries, for example, in South America. These countries are being provided with products from factories in Sweden or China. Ericsson is mainly trying to use regional supply chains, since they produce large volumes and are dependent on short lead-times. For example, the factories in Sweden are mainly using suppliers located in western or Eastern Europe. Trade barriers and governmental demands were usually determining where production bases were located, e.g. both the decision to enter Brazil and China were based on governmental demands. However, today manufacturing in China and Eastern Europe is mainly based on low cost advantages. For complex products Ericsson is mainly working with global suppliers even in tier 2 and tier 3. On other occasions, where the products is less complicated global suppliers in tier 1 are finding their own local suppliers in lower levels of the tier-structure, in order to get a better cost-structure. Ericsson encourages this, since it renders possible including local suppliers without involving Ericsson in that process. Scania Scania has a world-wide web of suppliers and they work actively to focus on suppliers that can supply on a worldwide basis. When choosing suppliers, the total cost is the determining factor. Sometimes transportation costs are significant, which favours suppliers nearby. In other occasions, a large cost reduction in price renders possible transportation over longer distances. Scania requires a global presence; the minimum requirement is usually for a supplier to have production in Europe and South America, since Scania’s production bases
~ 46 ~
are found in those locations. Only in certain circumstances, when there is a requirement for local presence or if it is “unnatural” to ship certain parts and components, Scania will choose local suppliers. Another reason for evading their supply strategy of favouring global suppliers is when it is impossible to mix the parts and components of certain suppliers. The type of order will decide where the production takes place. A truck will be manufactured where it is most convenient and cost efficient. This however entails that the customers sometimes have to endure long lead times. Volvo Truck Corporation Seeing that Sweden has a rather small industry compared to that of, for example Germany, VTC started at an early stage to use global suppliers, since they were the only ones available. The majority of VTC’s suppliers are European, with production in Europe. Recently, however, there has been a trend for the suppliers to start setting up production in Asia. Given that VTC produces large volumes, they need suppliers that are able to meet the required quantities but also to be able to take the development costs. Only simple details, such as sheet metal can be bought by local smaller suppliers. Whether or not a supplier is located nearby the production facilities is not always important, as long as they can deliver on time and to a reasonable cost. Lead-time and flexibility determine how close the suppliers need to be. This usually implies that the supplier must have production bases situated at several locations in order to meet the requirements. 4.4.3 Control vs. Autonomy Control vs. Autonomy concerns the independence of the productions and assembly plants vis-à-vis the HQs, i.e. where decisions are taken. Ericsson Ericsson is divided into five different business units (BU), where every unit, centrally managed, is responsible for choosing suppliers for the entire unit. There are also a division called the International Purchasing Offices located in China, USA and Japan, helping the BUs to find local suppliers. They are, as explained by Ericsson, “involved” but not “leading” the process. The BUs manage all strategic and tactical purchases centrally and are in charge of negotiations and contract formulations. Each BU has compiled their individual “preferred supply list” for the whole world. Suppliers from the list are to be used
~ 47 ~
first and foremost but if new suppliers are to be used, the process of evaluation is quite extensive and decision making are involving high positioned executives. There is also an additional unit, Group Function Sourcing, managing and coordinating across the BUs. Scania Scania has a hierarchical structure regarding the selection of suppliers and all decisions are taken by the HQ in Södertälje. They prefer this type of organisation, since they claim that they at the HQ see the “whole picture” and they think in “Scania-terms”. Larger decisions are taken by the procurement office in Södertälje, whereas smaller strategic decisions can be made by the Global Procurement Council (GPC), which has representatives from both the production division and construction division. If it is a decision regarding suppliers in, for example South America, representatives from South America will be present. The final decision, however, is always made at the HQ. Allowing more decisions to be taken by production centres will dissolve the “Scania thinking” and too much focus will be put on a specific production plant. It is important that the choice of, for example, a certain supplier is good for the entire organisation and not just a specific plant. If all decisions regarding the choice of suppliers were taken by the specific production plants, too much time and money would be spent on quality evaluation and negotiations with suppliers. Scania has one product that they deliver on a worldwide basis and it is crucial that this product is exactly the same everywhere. Having many local suppliers implies a major effort in controlling and ensuring that all parts and components are equivalent everywhere. Scania do acknowledge that by taking all the decisions at the HQ, some opportunities in local markets may be lost but they stress that in the end, thinking in terms of the entire organisation is most efficient. Scania is in fact moving towards an even more controlled procurement management and will move even more of the decisions upwards in the hierarchy.
~ 48 ~
Volvo Truck Corporation VTC is formed in a matrix organisation, which means that there is a global structure with global directors and local structures with local directors. For the procurement department, VTC has strategically located six purchasing divisions spread around the globe. Even though the purchasers are located in different countries, they are buying units for the entire organisation. The decision of what suppliers to utilize is taken by the Volvo Global Sourcing Committee, which consist of a number of directors from divisions all over the world. Traditionally, the purchasing officer had large influence on the choice of suppliers; today however, the responsibility has moved upwards in the hierarchy and the role of the purchaser officer is changing into that of a coordinator with a preparatory function. When adding a new supplier, each supplier is evaluated according to a standard procedure, where they have to fulfil several requirements. Those that fulfil the criteria are presented to the Global Sourcing Committee which, as previously mentioned, takes the final decision. The supplier selection has become more bureaucratic and time-consuming, but on the other hand, it has also become more structured and less influenced by personal opinions of, for example, the purchasing officers. The procedure also implies that the different suppliers are more easily compared.
~ 49 ~
5 Reaching the End of the Path
~
Our purpose was to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company, when entering a new market. In order to fulfil our purpose, we will discuss the empirical findings in relation to the theoretical material with the objective of answering the research questions in the final part of the thesis. The structure of this chapter is the same as the one found in chapter three, i.e. starting with network and internationalisation aspects and concluding with the paradoxes.
5.1 Network aspects
When the supply chain has been transformed into a network, where cooperation is more beneficial than competition, Christopher (1998) stress that there is no point in transferring cost upstream or downstream, since all costs will make its way to the end user anyway. Although VTC’s view is that, seeing that the suppliers normally have many customers requesting similar products, they can divide the development cost on larger volumes. Therefore VTC can transfer some of the costs to the suppliers, without affecting the final price. This can of course only be valid for standardised components, since this strategy only is successful if the suppliers have many customers that demand the same component. Products that are in some way adapted to a specific customer cannot, according to our view, be part of this strategy. If there is only one customer for a product, the development cost cannot be reduced, thus the result would be a transfer of costs within the same network, which according to the theories is ineffective. If all costs are transferred to the end user, it is essential to strive for cost minimization. Our empirical results show that the companies do not own any or only a few of their suppliers. Our thoughts regarding this is that by owning a supplier, the cost of their component is not subjected to competitive forces (the MNC ought to utilize the ‘in-house’ supplier, otherwise owning the supplier is useless) resulting in a higher price, thus increasing the total cost of the complete product. Managing the supply chain, according to Christopher (1998), first requires the need for a higher level of joint strategy development. With our selected companies in mind, we find it difficult to believe that there is a high level of
~ 50 ~
joint strategy development, since they all have a large number of suppliers. Ericsson, that has the smallest number of suppliers, has for example 100 suppliers in tier 1. Even if all of the interviewed companies press that they cooperate as much as possible, our belief is, that the buying companies ultimately have the power, since they decide from whom they are going to buy. Especially in our case, seeing that the interviewed companies represents original equipment manufacturers (OEM). There is a possibility to see the selection of markets as a somewhat joint strategy development between the suppliers and the buying companies. In the situations where the MNCs are first to establish on a new market, they try to make their suppliers see the benefits of an establishment. The empirical findings also show that this can happen the other way around, i.e. a supplier can be first in on a market and then recommend the MNC to join. This behaviour shows, in our opinion, that there is an established trust between the MNCs and their suppliers. An establishment in a foreign market represents a large investment and the fact that the companies trust each others’ recommendations, supports our thoughts. Successful supply chain management is about obtaining profits for all parties involved and naturally there are benefits to gain if both the supplier and the MNC are established on the same markets. Secondly, there is a requirement for the members of the network to stop thinking in terms of self-interest and to take on a more holistic approach (Christopher, 1998). When the organisational form of companies have transformed into networks, placing the competition between supply chains instead of between companies, it is crucial that the network is optimised. If this is not achieved, the network will not be competitive enough, which is negative to all parties involved. On those occasions when there is more than one supplier available for a product, the competition favours the network. Competition pushes the prices downwards, which in the end is favourable for the end customer as well as making the entire network more competitive. When there is a few or even only one supplier available, they can concentrate more on their self-interest, i.e. keep a high price level, since they are not replaceable. This can be exemplified with Ericsson and the fact that they, in one case, only have one supplier for a certain component. A situation they dislike, since they are more or less required to comply with the demands of this supplier. In the future, Ericsson strives to avoid this, given that this behaviour does not favour the network and makes the entire supply chain less competitive. Thirdly, a transparency and visibility of relevant information throughout the network is essential, in order to make the network function to its full potential. Ericsson, for example, has insight into the affairs of the majority of their suppliers and in most cases Ericsson negotiates prices and contracts with their
~ 51 ~
suppliers’ sub-suppliers. In this case our perspective is rather limited, since we only have interviewed OEMs and from their point of view, they naturally have both insight and control throughout the network. Whether the other parties involved in the network easily can obtain relevant information, is not something our research can answer. However, our belief is that an OEM might have to guard certain information concerning their product or technology, seeing there is a possibility that some of their suppliers supply their competitors as well. In fear of company specific information or technology specifications ending up in the hands of a competitor, the MNCs might choose to retain certain information, which could prevent the network to reach its full potential.
5.2 The Internationalisation Process Today
The motives for starting production abroad today are the same as 20 years ago; the search for business opportunities or avoiding trade barriers such as high import tariffs. The theoretical explanations of why companies expand their operations abroad, i.e. resource seeker, market seeker and minimising the risk, are thus still valid and there is no need for significant modifications to the current business climate. However, there can be a minor modification to minimizing the risks. The current theory regarding this subject proposes an invitation from a customer to a supplier when establishing on a new market. Our suggested modification is that both suppliers and customers can recommend each other to enter a new market. The internationalisation process is, as expressed by the interviewed companies, easier today since they have more knowledge about operating in foreign markets. This is in accordance with the internationalisation theories of Johansson and Vahlne (1977), where they explain that when companies gain more knowledge and experience from foreign trade, the internationalisation process is facilitated. Ericsson stated that they will use their knowledge gained from their experiences in China when entering India. This proves that even though Ericsson has several year of experience from international operations, they are still learning. Therefore, the model presented by Johansson and Vahlne (1977), is still somewhat valid for companies like Ericsson. Even though the interviewed MNCs have extensive knowledge about operating abroad, there are of course always country specific circumstances which prevent an entry on a new market to be completely routinised. All of the interviewed companies expressed that the construction of a production plant on a new market is a rather ‘simple’ project. In the initial phase, all companies import their products in complete kits. Importing kits makes it feasible to start production without the proper suppliers established in the country. Since all of the interviewed companies’ suppliers to a large extent are
~ 52 ~
global, mainly in tier 1, these suppliers can, if they are not already present on the market, easily supply them from abroad. In many countries there is also a basic industry already established, that the companies can use for simple components, which results in importing only advanced systems and components. Depending on the purpose of entering a market, importing in kits continue if market presence is the only objective. If it is a strategic objective on the other hand, the search for suppliers starts. In many cases the suppliers are already there or they follow, since they too see the business opportunities. Ericsson has, for example, stipulated in their contracts that suppliers need to follow or help find new suppliers in a new market. A new plant will, according to the empirical results, not affect the supplier structure of the MNCs as a whole. New suppliers will be chosen if it is more convenient or if there is some type of governmental requirement or trade barrier. These suppliers will probably fit the current structure, given that they will be thoroughly evaluated. Our perception is that since all the companies are concerned about quality, these new suppliers can be seen as a complement to the entire supplier structure. No company expressed any problems in finding or bringing in suppliers to the new market. The establishment chain presented by Johansson and Vahlne (1977) could therefore be modified to fit this type of organisation in the current business climate. The first step would be the decision to enter a new market, a decision based on their own initiative or a supplier’s recommendation. The second step would be setting up a production plant followed by importing in complete kits. The last step depends on the strategic objective of the establishment, either importing continues or a supplier network would start to be established. These two alternatives can be related to the strategies of entering a network, offered by Håkansson et al (1993), i.e. successively or ‘big bang’. The successive entry is the one where the MNC continue importing in kits. In these occasions the MNC does not have the objective of buying as much as possible from the local market and are content with importing almost everything. This can be seen as peripheral activities in a network and as the MNC’s market share increases, they slowly become a more central actor. The ‘big bang’ entry is when the MNC enters a new market and build up an entire organisation, which is only possible for a company with a solid economic base. Since the interviewed companies are large corporations, their presence on a market will most likely affect many companies, thus causing a restructuring of the present network. The resources and capacity of the MNCs are likely to give them a central position rather quickly. From the industrial network approach, the interviewed companies have utilised the strategy called international extension, when they have established new positions in foreign networks. The international integration, i.e. increasing the coordination between positions in different national networks, can be
~ 53 ~
exemplified by the companies’ efforts of further structuring the purchasing activities and placing more control at the HQ. Forsgren and Johanson (1992) stress that it can be difficult for a newcomer to enter a network of stable relationships. According to Håkansson et al (1993), a new company, especially a large one, always signifies a threat to the actors in the network. However, according to Seyed-Mohamed and Bolte (1992), a company that controls a unique resource has an advantage in this situation. For the companies included in our research, this is especially true. A MNC should be welcomed in an emerging market, both from the host government and the domestic companies, since they represent large investments, provide skills and technical knowledge and offer employment opportunities. MNCs do of course also represent a strong threat to domestic companies and foreign MNCs already established on the market. However, the foreign MNCs established in emerging markets might welcome other MNCs, even if they are within the same line of business. If a new MNC bring a few of their suppliers to the market, the already established MNCs could benefit from the enlarged number of available suppliers. Aside from the benefits the MNCs can gain by controlling unique resources when entering an emerging market, they can also benefit from the fact that the market is recently opened for FDI and that domestic players are willing to start business relationships with foreign corporations, thus making the ties in the network weak. The three critical issues, presented by Axelsson and Johansson (1992), concerning what a company must consider when entering a new market, i.e. gathering information, positioning and timing will, according to us, have the following effects. Gathering information could possibly be facilitated if the MNCs already have suppliers in the chosen market. The fact that all of the interviewed companies have large resources both in terms of money and knowledge, the first critical issue should not cause major problems. Positioning will in this sense only favour the companies, since they already are present in over 100 countries. Timing is about identifying business opportunities and act quickly. Even though all of the interviewed companies have gathered a large amount of business intelligence over the years timing cannot, according the theoretical findings, be taught. Being present in many countries, however, increases the chance of being exposed to business opportunities, which is a criterion that is certainly fulfilled by our chosen MNCs. The organisational form, i.e. the network configuration, implies, as seen in the first chapter, a greater flexibility to respond to emerging market opportunities. Thus, this last issue, timing, might be facilitated due to the network form of large MNCs. Not only can the companies respond quickly to an opportunity because of the flexibility
~ 54 ~
provided by the network, their spread is also extended by the network. When companies worked independently they were only able to seize a limited amount of opportunities. However, the network form gives the companies an extended reach and it is probable that they, as a network, will be exposed to more emerging business opportunities. This could be the reason why the network form of companies has become so utilized, seeing that it is the most suited organisational form for today’s commercial environment.
5.3 The Paradoxes
When the competition is between value chains, the structure of these chains is increasing in strategic importance. How did our paradoxes stand the empirical testing? 5.3.1 High vs. Low Involvement All three companies that were interviewed are mainly focusing on long-term collaboration with suppliers in tier 1. Many of these suppliers are system suppliers and since these systems often represent large parts of the final product, a close cooperation is required in order to achieve the required standard and quality. This would, according to the theoretical findings, indicate high involvement. Our perception from our bachelor thesis was that a majority of the business relationships, found in tier 1, were high involvement. In a high involvement relationship, resources are invested and adaptation and coordination in production processes are required. This entails large costs in terms of lost investments for the involved companies, if they want to end the business relationship. Most of Ericsson’s suppliers in tier 1, are the same ones used five years ago, which according to Ericsson, signifies their long-term commitment. Both Ericsson and Scania term their supplier structure as mature, which we interpret as being a structure that has developed during several years and has a rather stable composition. This further advocates our belief that a majority of high involvement relationships are found in tier 1. Even if Ericsson mainly works with the suppliers in tier 1, they do engage with tier 2 suppliers, when the products are “Ericsson unique” and therefore requires closer cooperation. As described in chapter three, high involvement is necessary when the products are complicated or, as in Ericsson’s case, ‘unique’. If the companies work closely together with their suppliers, they can utilize the suppliers’ skills and capabilities in order to improve their own products and services. ‘Co-makership’ is a term used in order to accentuate the importance of this type of relationship. We can therefore note that there are high involvement
~ 55 ~
activities in tier 2 as well. Scania claimed that in order to assure quality they would go down as far as needed in the tier structure, which could indicate high involvement even further down the tier structure. Scania’s model 4.1 also shows that low involvement suppliers are present in tier 1. This implies that being a tier 1 supplier does not necessarily mean high involvement. Gadde and Snehota (2000) assert that a company can have a close relationship with few selected suppliers, since this type of relationship is resource intensive and can only be managed with a limited number of suppliers. This would explain the presence of low involvement suppliers in tier 1 and also how the companies are able to handle a large number of suppliers in tier 1. All three companies are in businesses where low cost is a determinant factor for success and they try as much as possible to work closely together with their suppliers, in order to attain reduced costs by, for example, improving production processes and material flows. The interviewed companies are to a large extent, interested in not only how the suppliers work but also their suppliers’ involvement with their sub-suppliers. The purpose is to find cost reductions for the supplier and consequently for themselves. The discussions during the interviews were mainly focusing on cost issues, when dealing with the choice of suppliers. However, when looking at the guidelines for selecting suppliers received from Scania, for example, they pointed in another direction. Cost is the fourth consideration following safety, quality and delivery. Ericsson also has guidelines in which cost is surpassed by, for example, quality and environmental thinking. We believe that due to fierce competition between suppliers and high requirements from their customers, issues such as safety, quality and delivery are basic criteria that need to be fulfilled by the suppliers, in order to even be considered as a possible supplier. Cost, however, is something that can be improved through collaboration between supplier and customer and through development in production processes. Therefore, cost ends up as the most determining factor when choosing suppliers. Regarding more complex products, however, VTC states that when there is only a few suppliers available, cost issues are secondary and performance requirements becomes determining. Outsourcing represents the “new” network thinking, i.e. outsourcing to suppliers creates the linkages in the network. Our opinion is that, in these networks, the high involvement relationships signify strong ties thus resulting in a strong network. When resources are invested and production processes are adapted, the cost of breaking up a business relationship with a supplier is increased, thus creating barriers for outside parties. Buying companies can be reluctant to break certain relationships because of sunk costs. The low involvement relationships, on the other hand, where price determines which supplier to use, symbolizes
~ 56 ~
weak ties. Switching suppliers, for example, is easy in a weak network, since no or little resources have been invested in the relationships. When presenting the model to the companies they all agreed to the accuracy of the content of the model but explained that they did not think specifically in those terms in an internationalisation situation. However the model, according to the companies, depicted perfectly the achieved result.
Local domestic suppliers Low involvement
50 % High involvement Foreign suppliers Import 50 % Figure 5.1 High and Low Involvement Effects
5.3.2 Concentration vs. Dispersion The location of the suppliers has not yet affected any of the interviewed companies’ internationalisation processes. This can in part be explained by the strong focus each company has on global suppliers. The majority of the interviewed companies’ high involvement suppliers are today large corporations active on a global basis. When starting up production on a new market, the companies are often dependent on having these high involvement suppliers nearby, since they often supply complete systems. The relationships with these suppliers have been developed during a long period of time and those suppliers are not easily replaceable. None of the interviewed companies have, so far, encountered any problems concerning the location of the suppliers, since there is usually a common interest for both parties to be active on the new market. Seeing that these suppliers can supply on a world wide basis, it does not matter where in the world these MNCs decide to start production. Ericsson has even created a safety net by stipulating in some of their contracts that the supplier must either follow them into a new market or help them find new suppliers
~ 57 ~
The theoretical findings points out that the more complex products, the closer the suppliers want to be to their customers. Another factor that advocates the suppliers’ presence close to their customer is that business meetings face to face will facilitate certain activities such as product development. It could be possible that, if a MNC has two suppliers for a certain component, they will prefer the supplier that is located closest to their own factory. Even though information can now, as described by Kelly (1999), be more easily distributed in ‘space’, we believe that the significance of a face to face meeting is still high, especially regarding high involvement relationships. Having a high involvement relationship with a customer could make the supplier more willing to follow a MNC into a new market seeing they have invested resources in the relationship. However, it could also have the opposite effect, making the supplier less prone to move. If resources are invested and processes have been adapted, neither company might be willing to break the relationship because of sunk costs. This would make the supplier less replaceable and if the MNC moved into a new market, they might not be willing to change or find a new supplier, seeing they would have to spend time and money in a new relationship. Therefore, a high involvement relationship can have two opposite effects on the location of the supplier. The supplier could decide to follow the MNC due to the advanced products that they deliver. However, a supplier could also decide to stay in their home market, since they are not easily replaceable and given that they can supply into the new market, they do not need to follow the MNC. In figure 5.2 a high involvement could therefore cause both a concentration effect and a dispersion effect. The low involvement suppliers usually supply less complicated products and it is not as important for the MNCs that they follow into a new market. These products can often, as expressed by Scania, be found in the basic industry already established on the market. From the suppliers’ point of view, it is more important that they follow, seeing that they are easily replaceable. Therefore, to secure the business relationship, our thoughts are that the low involvement suppliers are rather concerned with being close to their customers. On the other hand, a supplier that produces a simple component might be less dependent on a certain customer, seeing their product is standardised and used by many different customers. A complicated product or a product close to final assembly, should result in only a few available customers and consequently, the supplier ought to be more dependent on these customers. Therefore, these suppliers are possibly more inclined to secure these business relationships and more willing to follow into a new market.
~ 58 ~
However, in practice the suppliers cannot be close to every customer. According to VTC, whether or not the supplier is located near the production facility is not always important, as long as they can deliver on time and to a reasonable cost. VTC states that lead-time and flexibility determine how close the suppliers need to be. Ericsson focuses on regional supply chains, since they are dependent on large volumes and short lead-times. This however, usually implies that the supplier must have production bases situated at several locations in order to meet the requirements. Scania favours suppliers nearby when transportation costs are significant. On other occasions, a large cost reduction in price renders possible transportation over longer distances. Christopher (1998) claims that large corporations often are too concentrated on cost reductions to realize that the cost of longer pipelines may outweigh the cost saving. Another disadvantage with a long pipeline is the increased risk of transporting cargo over longer distances or as in the case of Scania, where the customers sometimes have to endure long lead-times. All of the theoretical findings point at the benefits of having suppliers nearby, however as mentioned earlier, in practice this may not be possible. Determining where the suppliers are based seems solely dependent on the characteristics of product the suppliers produce, for example: large volumes (can influence the lead-time and flexibility), production time (will also have an effect on lead-time and flexibility) and product size (will influence the transportation costs). When bringing together the theoretical findings with the empirical results, the arrows in figure 5.2 do not need to be modified. The empirical findings, however, gave an explanation to the location of the suppliers. It is important to have suppliers nearby but, it is lead-time, flexibility, volume and transportation costs that will decide where the suppliers are located.
~ 59 ~
Local domestic suppliers
50 % Dispersion Effect
Concentration Concentration Effect Effect
Foreign suppliers
Import 50 % Figure 5.2 Concentration and Dispersion Effects
5.3.3 Control vs. Autonomy When dealing with a global pipeline Christopher (1998) states, that it is crucial that the organisation finds the correct balance between control and local management. To manage and control the extensive network of suppliers, strategic decisions should be taken centrally, while the supervision and control of supplier actions and the daily cooperation with logistics partners ought to be managed locally. Doz (1986) is of the same opinion and claims that transnational investments decisions are usually of a rather complex character and should be taken by top management, resulting in a centralized investment decision function in the majority of network enterprises. According to the theoretical findings, only by having central planning and co-ordination, companies can attain cost minimization and service maximization. The interviewed companies all have hierarchical purchase divisions, governed from the HQs: Ericsson - Group Function Sourcing, Scania - Global Procurement Council and VTC - Global Sourcing Committee. The mission of these units is to find and prepare contracts with suppliers all over the world. The reason for this type of organisation is that they are concerned about offering the exact same product regarding quality and performance all over the world. In order to offer homogenous products, the HQs need to execute strong supervision towards the productions plants, especially regarding the selection of suppliers. The companies also provided company specific reasons for having a central institution performing this kind of activity. For example, VTC expressed the advantage of being able to compare different suppliers according to certain standards. Scania stresses the fear of losing “the Scania thinking”, if local plants were given the freedom to choose suppliers. The negative effects of governing the choice of suppliers on a central level might be the risk of missing out on
~ 60 ~
opportunities offered on the local market. Even though most of the decisions regarding the supplier situation are handled by specific councils or institutions, the responsibility of improving and increasing the efficiency of the current supply structure is often delegated to the local offices. VTC terms their supplier structure as fixed, which indicates that no major changes are occurring. This paragraph show how the theoretical findings reflect the empirical results, i.e. the companies all utilize a strict control from the HQ but with some responsibility delegated to local offices. Regarding for example companies that manufacture consumer products, our view is, that it should be more important to adapt the product to local requirements. Consequently, local agents and production plants might have more influence on product design and also what suppliers to use. When the MNCs concentrate on their core competencies and outsource more to suppliers, the role of the purchaser might change. In order to keep control over the supplier network, the work of the procurement division becomes more complex. They need to make sure, for example, that the level of quality does not deteriorate when dealing with an increased number of suppliers. Furthermore, when the choice of which suppliers to buy from is taken by institutions high up in the hierarchy, our view is that the function of the purchaser is slowly moving towards a coordinating role, which is also the case in VTC. Given that decisions regarding the suppliers are taken by special councils or institutions and the fact that thorough evaluations of each contracted supplier is performed, we believe that a rather stable supplier structure is created in the interviewed companies. They have termed their supplier structure as mature and fixed, however, we have chosen to use the term stable, rather than using the terms provided by the companies, since we find that the word incorporates both. The supplier structure should be, according to us, more stable in higher levels of the tier structure. As mentioned before, a majority of high involvement relationships are found in tier 1, increasing the stability of this level. The empirical material shows that when entering a new market, local suppliers are often found for simple components. This highlights a variation in the composition of the suppliers in lower tier levels, thus making lower levels less stable. Since the competition has moved from between companies to between entire supply chains, there might be a necessity to have a stable supplier structure. If parts of the supplier structure are constantly changing, it might cause confusion and decrease the efficiency of the entire network. The final result would then, in our view, be a less competitive network. Our thoughts are that when the network configuration of companies was not so prevalent, it might have been less
~ 61 ~
important with a stable supply chain. At that time, companies were to a less extent dependent on others, therefore is could have been easier and more profitable to change suppliers often in search for benefits such as cost reductions. Today however, the network configuration requires some sort of stability in order to reach efficiency. The factors presented by Prahalad and Doz (1987) that either enhance or impede the control of the HQ, cannot completely be applied in our case, since they concern control over subsidiaries. We deal with the control over production plants, which entails a closer cooperation than with a subsidiary. A production plant is naturally dependent on the HQ for resources such as technology and finances, seeing that a production plant is an extension of the mother company and not an independent company. The strategic vision and competitive strategy are equivalent, since it is the same company. Systems that recognize contributions to the global strategy are present in the centrally governed organisation and finally loyalty to the HQ is self-explanatory. Our opinion is, that in order for the HQ to maintain the control over the production plants, activities that encourage independence ought to be avoided, for example placing the development at the HQ and not at the production plants. By keeping a bureaucratic procurement organisation, the process of adding new suppliers is complicated, thus further limiting the independence of the production base. The factors that impede the HQ’s control over subsidiaries can be applied more successfully to our case. These factors mainly deals with regulations of the host government and the presence of JV partners, which will all restrict the control the HQ is able to exert, whether or not it concerns a subsidiary or a production plant. The model 5.3 shows our ideas of the effects of the HQ being in control of the choice of suppliers versus the local offices deciding what suppliers to use. Our thoughts are that companies that are centrally governed will be more inclined to continue using those suppliers to which they already have a well established relationship. If those suppliers are not present on the new market imported components will represent a large volume. This is depicted in figure 5.3 with the dashed horizontal arrow. If the old relationship suppliers are present on the new market, they will be preferred, as shown by the dashed vertical arrow in the same figure. If the production bases on the other hand, are in charge of choosing suppliers, they might be more open to the idea of using local domestic suppliers.
~ 62 ~
Being locally present implies being closer to the market and hence more up date with developments in the market place and therefore more exposed to emerging opportunities. This movement is illustrated by the black vertical arrow.
Local domestic suppliers Autonomy Effect
50 % Control Effect Import 50 % Figure 5.3 Autonomy and Control Effects
Foreign suppliers
At the starting point of this thesis we believed that Control vs. Autonomy would be a more influencing factor when constructing a supplier structure on a new market. However, when analysing the empirical findings we have come to the conclusion that this factor rather concerns the maintenance, improvement and further development of the network structure.
~ 63 ~
6 The End of the Path
~
6.1 - How is the internationalisation process performed in a strategic network situation?
Based on the collected information from the interviewed companies, we have constructed an establishment chain for the MNCs adapted to the current business environment. The first step, see figure 6.1, is the decision to enter a new market, initiated by the MNC or a supplier, followed by a rather quick set up of a production plant. The second step can be performed rather rapidly since MNCs have the required resources, knowledge and foremost plenty of experience. Step three entails importing everything or almost everything in the initial phase of the establishment; this is made possible due to a global network of suppliers who are able to supply on a world wide basis. The last step depends on the strategic objective with the establishment.
Continue importing - if presence in the country is the only objective Decision to enter a new market Build up production plant Import complete products in kits Start constructing a supplier network and surrounding sales and marketing functions
Figur 6.1 Establishment Chain
If only presence in the country is sought, due to for example, the small size of the chosen market, importing will continue. This represents a small commitment to a foreign market and can be seen as peripheral activities in a new network. If there are benefits to gain, such as low cost labour or trade regulations forcing a company to buy from the local market, more or less a complete organisation will be established in the country. A complete organisation is, in this aspect, when a MNC makes large investments in the market and starts constructing a supplier network and surrounding sales and marketing functions. This step requires a solid economic base and results in a restructuring of the network on the local market, since the MNC quickly gain a central position.
~ 64 ~
Given that a network needs to be optimised in order to compete effectively, new suppliers from the local market will probably be added. However, no major changes on the current supplier structure will occur and new additions can be seen as complements rather than a restructuring.
6.2 - What factors influence the construction of a supplier structure in a world based on networks?
The factors below, starts with an encompassing perspective and then each following factor will provide more detailed aspects, ending with characteristics originating from company specific factors. • Degree of networking When a change in the economic environment (liberalisation and IT) and competition forced companies to start outsourcing in order to stay competitive, the organisational form changed from single independent companies to members of a network of resources. The network form renders a move or a start up of production abroad to be done in isolation impossible, seeing that every action of a network member will affect the entire network. However, as more companies increase their foreign operations, a large part of the network becomes internationalised, which facilitates a move or a start up of production for a MNC. So, when constructing a strategic network on a new market, suppliers with an international presence have little or no problem with supplying to the new location. In certain occasions, the suppliers are already present on the market before the MNC enters. This renders possible the usage of the same suppliers in several markets. Consequently, there is no need to reconstruct the supplier structure or spend significant resources on finding new suppliers. Thus, the network configuration results in the possibility for a MNC to easily set up production and simply focus on their core competencies. When companies are organised in networks the optimisation of the network becomes an important issue, especially since the competition lies between entire supply chains. Therefore, there is a need to think in terms of the entire network and minimize opportunist behaviour, in order for the whole network to be competitive. Seeing that everybody benefits if they work with a more holistic approach, companies with too much focus on their ‘selfinterest’ will be excluded. The network configuration creates synergies
~ 65 ~
between the suppliers and buying companies, seeing that they can benefit from each other’s competence. It also provides a necessary flexibility for MNCs to respond to opportunities in a fast changing environment. A small change to any part of a network can cause effects on the entire network. However, the controlling function of the MNCs seeks to optimise the network and works actively to minimise any negative effects, which will be more thoroughly explained in the following paragraph. • Level of knowledge A well established MNC represents large assets in terms of resources and experiences accumulated during a long time. A buying company, especially an OEM, will not only be at the centre of a network but also in charge of what suppliers to include. In a network situation, it is important for an OEM to have control, not only in order to assure quality, but also to maintain efficiency. To increase the control over the members of the network, an OEM can utilise strict evaluation procedures and place decisions regarding adding new suppliers on a high level. This creates a hierarchical procurement function. In order to avoid some of the disadvantages of this type of procurement function, i.e. difficulties of adding and switching suppliers, long-term commitments are prioritised. Development between a customer and a supplier where, for example, production processes are adapted, gives rise to high involvement relationships, which creates strong ties in the network. These ties can function as a barrier for outside parties, as well as a security for the involved parties, i.e. neither party is willing to terminate the relationship because of investments made in the relationship. Strong ties in the network, long-term commitment in combination with a complicated and bureaucratic procedure of adding new suppliers, results in a rather stable supplier structure for a MNC. • Type of market The type of structure that will be constructed in a new market will be adjusted to the characteristics of that market, i.e. the type of market. Emerging markets are probably the most likely locations for global corporations to invest in today, especially for manufacturing companies, since these markets render possible the opportunity of, for example, low cost labour. Those markets mainly consist of a basic industry, where the existing networks are weak and in some areas incomplete. Without the presence of
~ 66 ~
strong network barriers, these networks are easy to enter. Especially large foreign corporations are welcomed by the governments as well as by companies, seeing that they can provide the country with, among others, more advanced technology. In an emerging market, where an inflow of FDI probably causes market conditions to constantly change, the network structure is well suited, since it allows a company to quickly respond when market conditions are altered. • Degree of commitment The last factor that affects the construction of the supplier structure is the purpose of the establishment, i.e. the degree of commitment to the market. From the empirical results we have found two different types of establishments: assembly plants or production plants. The former does not represent a large commitment to the new market and can be supported entirely by imports, resulting in the possibility to use the exact same supplier as before. This type of establishment has little or no effect on the supplier network as a whole and the assembly plant can easily be dissembled and moved, if market conditions change. The latter, however, represent a larger commitment and often require the presence of certain suppliers. This could cause some effects in the supplier structure, when new suppliers are added or exchanged. New suppliers can be added due to governmental demands, such as local content, other suppliers might be replaced if they cannot supply to the new market. However, these changes will probably not have any major implications for the network as a whole, seeing that the structure is rather stable.
6.3 Fulfilling our Purpose
Our purpose was to explore what factors influence the construction of a strategic network of suppliers of a manufacturing company, when entering a new market. As mentioned in the answer to the second research question the factors are: network form, established MNC, emerging markets and the objective with the establishment. Our focus was on the construction of a supplier network; however, we found that the existing supplier network is not affected in a significant way when entering a new market. We found that the supplier networks of the MNCs are rather stable with world coverage. Certain local suppliers will be added on the local market but these can be seen as a complement to the original supplier structure, rather than a restructuring. These local suppliers often represent basic components that most likely are cheaper to buy locally than ship over long distances. Therefore, a MNC is
~ 67 ~
capable of, more or less, applying their entire network of suppliers to a new market anywhere in the world. In those cases, where the entire network cannot be used, the gaps are either filled with imports or with new local suppliers, i.e. domestic or foreign suppliers established on the market. It is interesting to note that an organisational form, i.e. the network configuration, originating from an unstable environment, shaped to be able to handle uncertain events and making it possible to quickly adapt to environmental changes, has given rise to a stable network of suppliers. There is almost something contradictory over the fact that an organisational form created to be flexible can be stable at the same time. In conclusion, according to our results, internationalisation in a network based world will not have a significant influence on the current supplier structure of a MNC.
6.4 Further Interest of Study
• Quantitative research on the same subject in order to give the results statistic accuracy. • What would a similar situation look like for medium sized companies?
~ 68 ~
7 Bibliography
~
Amaratunga, D., Baldry, D., Sarshar, M. & Newton, R. (2002), Quantitative and Qualitative Research in the Built Environment: Application of ”Mixed” Research Approach, Work Study, Vol 51 No 1, pp. 17-31 Andersson, S. (2000), Suppliers’ International Strategies, European Journal of Marketing, Vol 36 No ½ p.86-110 Arbnor, I & Bjerke, B. (1997), Methodology for Creating Business Knowledge 2nd Edition, Sage Publications, Thousand Oaks Aronsson, H., Ekdahl, B. & Oskarsson, B. (2003), Modern Logistik – för ökad lönsamhet, , Liber, Lund Atkinson, A., Shaffir, W. (1998), Standards for Field Research on Management Accounting, Journal of Management Accounting Research, Vol 10 Axelsson, B. & Johanson, J. (1992), Foreign Market Entry – the Textbook vs. the Network View, in: Axelsson, B & Easton, G. (ed.) (1992) Industrial Networks – A New view of Reality, Routledge, London Befring, E. (1994), Forskningsmetodik och statistik, Studentlitteratur, Lund Bell, J. (2000), Introduktion Studentlitteratur, Lund till forskningsmetodik, 3:e upplagan,
Burns, T. & Stalker, G. M. (1994), The Management of Innovation Rev. ed (1961), Oxford University Press, Oxford Bäckman, J. & Modorato-Rosta, C. (2004), Constructing a Supplier Network – The Logic Behind the Strategic Options, Bachelor Thesis, University of Linköping Cardone-Riportella, C., Álvares-Gil, M., Lado Cousté, N. & Sasi, V. (2003), The Relative Effects of Clients-Following and Market-Seeking Strategies in the Internationalisation Process of Financial-Service Companies: A Comparison of
~ 69 ~
Spanish and Finnish Entities, International Journal of Management, vol 20, no 3, pp. 384-395 Castells, M. (1996), The Rise of the Network Society, Blackwell Publishers Inc, Cornwall Chandler, A. (1962), Strategy and Structure – Chapters in the History of the Industrial Enterprise (13th printing), The M.I.T Press, Cambridge Christopher, M. (1998), Logistics and Supply Chain Management, Financial Times Prentice Hall, Great Britain Daniels, J., Radebaugh, L. & Sullivan, D. (2004), International Business – Environments and Operations, 10th Edition, Pearson Prentice Hall, New Jersey Doz, Y. (1986), Strategic Management in Multinational Companies, Pergamon Press, Oxford Easton, G. (1992), Industrial Networks: a review, in: Industrial Networks – a New View of Reality, Ed. by Axelsson, B. & Easton, G., Kent: Routledge, London Eriksson L-T. & Wiederheim-Paul, F. (2001), Att utreda forska och rapportera, 7:e upplagan, Liber Ekonomi, Karlshamn Ernst, D. & Kim, L. (2002), Global Production Networks, Knowledge Diffusion and Local Capability Formation, Reserach Policy, Vol 31 p. 1417- 1429 Forsgren, M. & Johanson, J. (1992), Managing Networks in International Business, Gordon and Breach, Philadelphia Gadde, L-H. & Håkansson, H. (2001), Supply Network Strategies, John Wiley & Sons, Ltd, Great Britain (Chippenham) Gadde, L-H. & Snehota, I. (2000), Making the Most of Supplier Relationship, Industrial Marketing Management, Vol 29 p. 305-316 Gattorna, J.L & Walters, D.W. (1996), Managing the Supply Chain, MacMillian Press Ltd, Basinstoke
~ 70 ~
Greis, N., Kasarda, J. & Stock, G. (1999), Logistics, Strategy and Stucture, International Journal of Physical Distribution & Logistics Management, Vol 29 No 4, pp. 224-239 Gummesson, E. (2002), Qualitative Methods in Management Research, 2nd edition, Sage Publications, Inc., Thousand Oaks Håkansson, H., Laage-Hellman, J., Lundgren, A. & Waluszewski, A (1993), Teknikutveckling i företaget – Ett nätverksperskpektiv, Studentlittertur, Lund, Sweden. Hallén, L. (1992), Infrastructural Networks in International Business in: Forsgren, M. & Johanson, J. (ed.) (1992) Managing Networks in International Business, Gordon and Breach Science Publishers S.A., Philadelphia Halvorsen, K. (1992), Samhällsvetenskaplig metod, Studentlitteratur, Lund Hartman, J. (1998), Vetenskapligt tänkande, Studentlitteratur, Lund Holme, I.M. & Solvang, B.K (1997), Forskningsmetodik – Om kvalitativa och kvantitativa metoder, 2:a upplagan, Studentlitteratur, Lund Jacobsen, D. (2002), Vad, hur och varför?, Studentlitteratur, Lund Johanson, J. & Vahlne, J-E. (1977), The Internationalisation Process of the Firm – A Model of Knowledge Development and Increasing Foreign Market Commitments, Journal of International Business Studies, Vol 8 No. 1, p. 23-32 Johansson, J. & Mattson, L-G. (1988), Internationalisation in Industrial Systems – A Network Approach, in: Ford, D. (ed.) (1997) Understanding Business Markets, The Dryden Press, London Johansson, J., Blomstermo, A. & Pahlberg, C. (2002), Företagets internationaliseringsprocess – Lärande i nätverk, Studentlitteratur, Lund Keegan, W & Green, M. (2000), Global Marketing 2nd Edition, Prentice Hall, Inc. New Jersey Kelly, K. (1999), Den nya ekonomin, AB Timbro, Klippan Klint, M. & Sjöberg, U. (2003) Towards a Comprehensive SCP-model for Analysing Strategic Networks/Alliances, International Journal of Physical Distribution & Logistics Management, Vol 33 No. 5 p. 408-425
~ 71 ~
Kvale, S. (1997), Den kvalitativa forskningsintervjun, Studentlitteratur, Lund Laurence, P.D. (2000), Developing in Harmony, International Journal of Physical Distribution & Logistics Management, Vol 30 No 5, pp. 409-412 Lawrence, P. & Lorsch, J. (1967), Organization and Environment – Managing Differentiation and Integration (7th printing), Division of research, Graduate School of Business Administration, Harvard University, USA Lukka, K. (1995), The Problem of Generalizability: Anecdotes and Evidence in Accounting Research, Accounting, Auditing & Accountability Journal, Vol 8 No 5, pp 71-90 Lundahl, U. & Skärvad, P-H. (1999), Utredningsmetodik för samhällsvetare och ekonomer, Studentlitteratur, Lund McDougall, P. & Oviatt, B. (2000), International Entrepreneurship: the Intersection of two Research Paths, Academy of Management Journal, Vol 43 No 5, pp. 902-906 Miles M.B. & Huberman A.M. (1994) in: Amaratunga, D., Baldry, D., Sarshar, M. & Newton, R. (2002), Quantitative and Qualitative Research in the Built Environment: Application of ”Mixed” Research Approach, Work Study, Vol 51 No 1, pp. 17-31 Mohrman, S., Tenkasi, R. & Mohrman Jr. A (2003), The Role of Networks in Fundamental Organizational Change - A Grounded Analysis, The Journal of Applied Behavioral Science, Vol. 39 No. 3, p. 301-323 Ohmae, K. (1995), The End of the Nation State, McKinsey & Company Inc., London Olusoga, S. Ade (1993), Market Concentration versus Market Diversification and Internationalization: Implications for MNE Performance, International Marketing Review, Vol 10 No.2 p. 40-59 Patel, R. & Davidson, Studentlitteratur, Lund B. (2003), Forskningsmetodikens grunder,
Patel, R. & Tebelius, U. (1987), Grundbok i forskningsmetodik, Studentlitteratur, Lund
~ 72 ~
Prahalad, C.K. & Doz, Y. (1987), The Multinational Mission, The Free Press, New York Rahman, Z. & Bhattacharyya, S.K. (2003), Sources of First Mover Advantages in Emerging Markets – an Indian Perspective, European Business Review, Vol 15 No 6 pp 361-371 Reid. S (1983) in: Johansson, J. & Mattson, L-G. (1988), Internationalisation in Industrial Systems – A Network Approach, in: Ford, D. (ed.) (1997) Understanding Business Markets, The Dryden Press, London Rudberg, M. & Olhager, J. (2003), Manufacturing Networks and Supply Chains: An Operations Strategy Perspective, The International Journal of Management Science, Vol 31, p. 29-39 Saffo in: Kelly, K. (1999), Den nya ekonomin, AB Timbro, Klippan Seyed-Mohamed & Bolte, (1992), Taking a Position in a Structured Business Network, in: Forsgren, M. & Johanson, J. (ed.) (1992) Managing Networks in International Business, Gordon and Breach, Philadelphia Skjoett-Larsen, T. (2000), European Logistics Beyond 2000, International Journal of Physical Distribution & Logistics Management, Vol.30 No 5 Thurén, T. (1998), Vetenskapsteori för nybörjare, Liber AB, Stockholm Zsidisin, G., Panelli, A. & Upton, R. (2000), Purchasing Organisation Involvement in Risk Assessments, Contingency Plans, and Risk Management: an Exploratory Study, Supply Chain Management: An International Journal, Vol 5 No 2 p. 187-197
Electronic Sources
www.ericsson.com www.scania.com www.volvo.com
~ 73 ~
Interviews
Ericsson: December 9th, 2004 Anna Anhfalk, Manager Electromechanics, Group Function Sourcing Thomas Andersson, Manager Electronic Manufacturing Services, Group Function Sourcing Scania: November 24th, 2004 Marianne Petterson, Process Engineer Purchasing Olle Wengelin, Purchasing Manager Volvo Truck Corporation: November 26th, 2004 Lennart Carlsson, International Manufacturer Director Alf Karlsson, Supplier Improvement Coordinatior Tryggve Kristenson, Business Strategy Manager
~ 74 ~
8 Appendix
~
Intervjufrågor Intervjuperson: Titel: År på företaget: 1. Hur många länder är ni aktiva i? 2. Hur många länder har ni produktion i? 3. Hur stor del av värdet tillför ni produkten och hur mycket är utlagt på underleverantörer? 4. a) b) c) d) e) f) g) h) i) j) Hur ser ert underleverantörsnätverk ut i Tier 1 Hur många leverantörer finns i Tier 1? Hur långt ner i Tier-strukturen kan ni påverka/är ni involverade? Långa/korta relationer? Hur pass kostnadsstyrda är relationerna? Finns det några leverantörer som inte är utbytbara, varför och hur påverkar det er relation? Hur ser er beroendeställning ut till era underleverantörer? Är några av era underleverantörer dotterbolag? Vad är trenden, har antalet leverantörer utökats eller minskat? Var tas besluten angående val av leverantörer? Hur självständiga är produktionsbaserna i förhållande till huvudkontoret? För- och nackdelar? Var sker produktutvecklingen?
5. Var har ni placerat era produktionsbaser, och vad är tanken bakom dessa val? 6. Hur försörjer ni marknader där ni inte har produktion? 7. Hur är leverantörerna fördelade över världen? 8. Hur viktigt är det att ha geografisk närhet till era underleverantörer? 9. Vilken var den senaste marknaden ni gick in i med produktion? k) Hur såg processen ut vid uppbyggandet av underleverantörsnätverket? 10. Har utlandsetableringsprocessen förändrats? 11. Vad tas i beaktande vid en utlandsetablering idag? 12. Hur stor påverkan har syftet med etableringen på etableringsstrategin?
~ 75 ~
doc_103574229.pdf