taking craft beer global - scripties - bibliotheek

Taking Craft Beer Global Accelerating the Internationalization Process for Newly

Formed Subsidiaries

A company project for:

The Amsterdam MBA Company Project University of Amsterdam Student: Jacob Collier Student ID: 11352809 Email: [email protected]

Supervisor: Markus Paukku Email: [email protected]

Submission Date: 31/08/2017 Please handle this thesis in a confidential matter as the company information shall not be published for a period of six years.

Accelerating the Internationalization Process - Subsidiary


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Executive Summary The explosion of craft beer in the United States over the past decade has allowed for an entire

industry to be re-thought, re-tooled, and reinvigorated with a passion that hasn’t been seen in

over one hundred years. This market is now experiencing a tipping point, a state of over

saturation, that is placing pressure on the breweries to increase quality, expand distribution,

improve marketing strategies, all while providing a product at a price that appeals to the

consumer. Breweries are having to make the difficult decision on how to support further growth

to maintain competitive whether it be internal reinvestment, taking outside money, or leveraging

debt through a financial institution.

The company at focus of this research project is a California based brewery, The Lagunitas

Brewing Company. Lagunitas has grown over the past twenty years to become a top ten brewery

in the United States with ambitions to take their products across the globe. In doing so, Lagunitas

first created a joint venture with Heineken, the second largest brewer in the world, and two years

later became a wholly owned subsidiary of Heineken. Lagunitas is now operating under the

control of a multinational and must efficiently navigate this new corporate environment by

capitalizing on the opportunities that it provides for globalization.

Hence, this study concentrates and analyzes how firms go about internationalization and the

various foreign direct investments that will enhance the experience. Moreover, in order to boost

the involvement within a multinational corporation, this paper dives into the effects and resulting

relationships a subsidiary has when they take on additional initiative. Additionally, the study

concentrates on the significant of knowledge flow and how becoming an outsider can affect

overall performance.

The results of this paper originate from the secondary research, interviews and, experiences from

both Lagunitas and Heineken’s different business units including operations, sales, and export.

The findings are presented as recommendations for Lagunitas so they can successfully operate

and grow while maintaining a strong relationship with their new parent company. The findings

cover subsidiary behavior, vertical and horizontal communication, and the access of knowledge.



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Table of Contents Executive Summary………………………………..………......………………………………...1 Table of Figures………………………………..…………..........………………………………...4 I. Introduction………………………………..………………….……………………………….6

A. Background………………………….…………………………………………………….6 B. Research Objective…………………....…………………………………………………..7 C. Research Approach………………………………………………………………………..8

II. Case Stakeholders…………..…………………………..…………………………………...10 A. Company Overview……………………………………....……………………………...10 B. Strategic Competitiveness………………………………………………………………..11 C. Strategic Partnerships……………………………………………………………...……..12

III. Market Analysis…………………………..……………….…..………..……................….13 A. Industry Overview……………………………………........…………………………….13 B. Competition………………………………………………………………………………14 C. Innovation……………………………………………………….…………………….………………….16

IV. Literature Review/Underlying Theory....……………...…..….………………….………………….18 Part I: The Internationalization Process……………………………….………..…………..…………...19

A. The Strategic Choice of Internationalization……………..…………………..………19 B. Uppsala Model……………………………………...…….………….…………….…20 C. Liability of Foreignness…………………………........………………………………22 D. CAGE Framework…………………………..…….…………………………….……23

Part II: Foreign Direct Investment……………………………...……………………....……25 A. Wholly Owned Subsidiary or Joint Venture……………....……………….…………25 B. Theories of Entry Mode…………………....………….……………….……………..27

i.Transaction Cost Theory……………………………….…………………...…..28 ii. Resource-based Theory……………………………….…………....…………....29 iii. Institutional Theory……………………………….………………………….…………..30 iv. OLI Eclectic Framework……………………………….……………………..………....31

Part III: Subsidiary Operations…………………….………………………………………….….……….32 A. Knowledge Flow…………………..…………...…………………………………………...……...33 B. Subsidiary Initiative……………….………………….……...………………………….………….37

V. Methodology…........................................................................…………….…………….………….……..…41 VI. Managerial Recommendations…..................................…………….…………….………….……..…42

A. International Growth Strategy…….………………….……...……………………………....….……42 B. Recommendations for Subsidiary Survival..………............................…………............................45 C. Priorities and Next Steps........................................................................................................................48

VII. References……………………………….……………………….……………………................................50



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Table of Figures

Figure 1. US Beer Production in 2016 ..........................................................................................13 Figure 2. US Brewery Count in 2016 ...........................................................................................14 Figure 3. Uppsala Model of Internationalization ..........................................................................21 Figure 4. Learning Engagement Strategies ...................................................................................23 Figure 5. CAGE Framework Distance Descriptors ......................................................................24 Figure 6. Mode of Entry Determinants .........................................................................................27 Figure 7. Asset Specificity and Frequency in Entry Mode Choice ...............................................28 Figure 8. OLI Framework .............................................................................................................31 Figure 9. Subsidiary Research over Time......................................................................................33 Figure 10. Knowledge Flow .........................................................................................................35 Figure 11. Subsidiary Capabilities Affect on Knowledge Flow ...................................................36 Figure 12. Subsidiary Resources and MNC’s firm-specific advantage.........................................37 Figure 13. Process Model of Subsidiary Activities and Resources...............................................39 Figure 14: Lagunitas CAGE Factors..............................................................................................42 Figure 15: Lagunitas International Expansion Strategy.................................................................43 Figure 16: Lagunitas Evaluation of Capabilities............................................................................47



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I. Introduction This thesis discusses internationalization strategy and theories of entry mode in foreign markets

in the context of the alcoholic beverage industry. Additionally, it elucidates how the focus

company, Lagunitas Brewing Company, can maintain a competitive advantage after becoming a

wholly owned subsidiary through initiative, access to knowledge, and interaction within a

multinational corporation.

A. Background The competitive nature of the business environment forces organizations to continuously look at

opportunities to improve and adjust their business strategies in order to maintain a competitive

advantage over the industry at hand. When industries or markets within that industry become

increasingly competitive, businesses are forced to make decisions that are foreign and

complicated in order to succeed in the long term. This increased competition occurs when an

industry becomes attractive, drawing interest and capital from outsiders. This competition can

come from many sides and without much anticipation.

This competitive environment has been growing at an exponential rate within the beer,

specifically craft beer, industry in the United States over the past one to two decades. This

competition has generated a flurry of new entries into the market, with the overall brewery count

in the United States doubling in the past four years (Brewbound, 2016). The new entries have

chipped away at established brands sales in the overcrowded shelves at supermarkets as well as

the limited draft selections at pubs and restaurants. The revenue that craft beer is accumulated

has also drawn the interest of larger financial players with private equity firms and large

multinational corporations (MNC) acquiring handfuls of breweries every year. Every brewery is

experiencing and reacting to this changing landscape in their own, personalized method that they

believe to be in the best interest of their business.

The business of focus for this company project, The Lagunitas Brewing Company, has chosen

the latter option; becoming the target of an acquisition from a large MNC, Heineken. A primary

reason behind the move to become a subsidiary was to gain access and knowledge into the route

to market into many foreign markets. Lagunitas believes that the way to ensure continued growth



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and success lies outside of their home market. They see opportunity abroad as they mature

locally, along with the entire American craft beer market. As Lagunitas enters a new phase of

growth and expansion, the company will have plenty of obstacles and difficulties along the road

to a successful global footprint.

The internationalization process will be a focus for Lagunitas in the immediate future.

Globalization has become attainable for many businesses, so it is now about how to succeed in

the most efficient and effective manner. There are many decisions to be made along the road, but

understanding the determinants of entry mode based of each foreign market might just be the

decisions that lead to longevity within the industry. Furthermore, Lagunitas is now operating as

a wholly owned subsidiary, which provides another litany of new opportunities, restrictions, and

ways of working. These will all test the company's culture and drive when up against the many

barriers of entry and acceptance in their new life.

Today, there are a wide array of papers, articles, and frameworks that discuss in detail the

ramifications of proper and improper internationalization techniques. The research also is quite

significant ito entry mode choice, foreign direct investment, and strategies for subsidiary success.

All of this research will be used to provide a comprehensive understanding as well as guidance

for Lagunitas as they move forward with their goal of globalization.

B. Research Objective The objective of this thesis is to provide recommendations and strategy for Lagunitas that shapes

their internationalization approach as well as how to have excelled performance as a wholly

owned subsidiary in the immediate future. Hence the key questions for this research that the

strategy and recommendations should answer are:

● How should Lagunitas decide where and when to expand and what mode of entry to

choose?

● What are the key ways to actively initiate within a corporation and what are goals of such

initiatives?

● How to best access, optimize, and become apart of the knowledge flow in their new

parent company?



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The main deliverables for this project therefore are:

● Regional entry mode selection criteria;

● Guidelines of how operate as a wholly owned subsidiary and

● Set of recommendations for maximizing and leveraging knowledge of parent company.

Lagunitas Brewing Company is well underway into its’ internalization process as well as

integrating into the larger holding company of Heineken. These next few years will have

significant impact into the longevity and success of the subsidiary; therefore it is critical that this

research provides appropriate recommendations for the imminent decision making process for

Lagunitas.

C. Research Approach

The process used to collect the information for this company project, in order to provide data and

research based recommendations, is a combination of a collection of literary and empirical

papers (secondary research), as well as drawing on numerous interviews and personal experience

within the organizations involved in this study: Lagunitas and Heineken.

Owing to the fact that their has been a detailed and diverse research history on the topics of

internationalization, the secondary research provides substantial theories and frameworks around

these concepts. The research behind subsidiary involvement and interactions with other

subsidiaries as well as the holding company is more of a newer topic of interest for academics.

For years the research on subsidiaries was limited to the setup, control, management, and human

resources aspects of the business. Fortunately, and what makes this project so interesting is that

research recently has focused on the subsidiary roles and flow of knowledge, which will be the

beating heart for Lagunitas.

Naturally, secondary research is not enough to provide the necessary recommendations required

for this project. Information was gathered from individual interviews at both companies from a

range of experts in order to build an appropriate understanding of the current setup and goals of

the new partnership. Moreover, the interviews are necessary to ensure that the recommendations

and strategies given at the end of this paper are aligned with the organization and easily



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comprehended and translated into successful execution. Interviews, however time consuming,

are essential to the research and provide an internal viewpoint of how the current business

operations are managed.



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II. Case Stakeholders

A. Company Overview

The Lagunitas Brewing Company began on a kitchen stove in 1993 in Lagunitas, California. The

brewery operations were moved quickly to Forest Knolls after Tony caught the stove on fire and

his wife evicted him. After only a year in Forest Knolls, after Tony ruined the community septic

system by pouring his spent raw materials down the drain, Lagunitas moved down the road to

Petaluma, California. The company currently still operates its’ corporate headquarters from the

Petaluma facility.

Since the mid 2000s, Lagunitas has been one of the fastest growing and most popular craft

breweries in the United States. The brewery increased its’ production from 27,000 barrels in

2004 to just over 100,000 barrels in 2010 and announced a $9.5 million expansion in 2012 in

Petaluma that would raise capacity to 600,000 barrels annually (BeerPulse, 2011). Lagunitas

opened a second production facility in Chicago, Illinois in 2014 with an ultimate capacity of

600,000 barrels annually as well. The Chicago brewery supplies the Eastern Unites States and

Europe with beer currently (Chicago Tribune, 2014). The brewery announced a third location in

2015 in Azusa, California that is slated to open in 2018 with a potential capacity reaching almost

1,000,000 barrels annually (Los Angeles Times, 2015).

Lagunitas has continued to outperform the United States beer market, where craft beer now

represents about 11% of total volume (Brewers Association, 2015). Lagunitas is the market

leader in the IPA segment, the fastest growing sub-segment within craft. The brewery leads the

way with the number one and number two six packs in the segment and had sold over 1,000,000

barrels overall in 2016. The brewery is planning to expand globally since it began a joint venture

with Heineken in 2015 with the remaining shares being acquired in 2017 (see Strategic

Partnership section).



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B. Strategic Competitiveness

Lagunitas has grown its’ beer depletions and distribution over the years by making strategic

decisions that have allowed them to enjoy a competitive advantage over the craft market in the

United States.

Lagunitas brewed its’ first batch of “IPA” in 1995 quickly becoming year round offering in their

product range. Since California competitor, Sierra Nevada, already dominated the pale ale

segment of the market, Lagunitas decided to make the IPA their flagship offering, the first

brewery in the country to do so. The label still reads “Lagunitas IPA” distinguishing itself in the

popular sub-segment of craft.

The brewery from early on has made it a priority to build great partnerships with its’ suppliers.

Lagunitas was the first in the industry to build a risk sharing and economic sustainability model

where the suppliers handle quality control. They have invested and partnered with a hand full of

hop producers that guarantees them quantities and pricing for highly sought after hop varieties.

The brewery has also signed long term contracts with barley farmers, foreseeing the coming

scarcity of the key ingredient in craft beer. The contracts offer protection against inflation as well

as quality incentives.

Lagunitas invested early on in the importance of a data driven sales department. In the attempt to

standardize their sales distribution data due to the growing list of regional distributors, the

brewery designed a digital, proprietary CRM platform for the sales team. The management tool

has allowed them to better control the conversation with its’ distributor partners as well as

making the sales force more efficient on the ground.

The brewery was built on personal, meaningful connections with its’ consumers and these

connections continue to drive their route to market. This culture begins in the workplace and

pours over into the community. It is the only brewery that has a Cultural Team that continue to

bring the original feeling of the brewery in an engaging way to customers around the globe.



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C. Strategic Partnership

The Lagunitas Brewing Company has enjoyed a successful partnership with Heineken since

2015, when it sold a 50% stake of the company. The joint venture began on September 8th,

2015. Since then, Lagunitas has continued to outperform the US beer market, where craft beer

now represents about 11% of total volume. Heineken announced that it acquired all the

remaining shares of Lagunitas on May 4th, 2017. Heineken has assisted Lagunitas' international

expansion, including entry into new markets such as France, Mexico, Italy and Spain, and

increased the availability of products in markets including the United Kingdom, Canada, The

Netherlands, Sweden and Japan. Following this transaction Heineken plans to accelerate the

export of Lagunitas to many more markets around the world (Heineken, 2017).

To maintain the Lagunitas free spirit and company culture, the business will continue to operate

as an independent subsidiary within Heineken International and will report to the Heineken

Americas Region. Tony Magee, the founder of Lagunitas, will remain active as Executive

Chairman of the company along with no changes to the current management team. In addition,

Tony will take a leading advisory role to Heineken and its Executive Team on the global and

local craft strategy (Heineken, 2017).



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III. Market Analysis

A. Industry Overview

The global beer consumption fell in 2016 by 1.4% to 1.6 billion barrels of beer. Yet because the

drinking-age population of the world grew by 1% in that time, beer consumption per drinking-

age adult declined even more, by 3.2%. The overall decline is almost entirely due to downturns

in China, Brazil and Russia, three of the five biggest markets. These markets accounted for

99.6% of the global decrease in the volume of beer drunk in 2016 (The Economist, 2017).

The industry is in the midst of a consolidation phase of growth. The largest multinational

beverage and brewing company, Anheuser-Busch InBev (AB Inbev), recently completed a $107

billion dollar buyout of the world’s second largest brewer, SABMiller (Forbes, 2017). The new

AB InBev has estimated annual sales of $55 billion and the company will have an estimated

global market share of 28%. Combining AB Inbev's market share with the next two largest

breweries, Heineken and Carlsberg, the top three breweries control more than 50% of the global

beer market. Figure 1: US Beer Production in 2016

Source: Brewers Association

The United States overall saw zero growth in 2016 maintaining production of 196 million

barrels of beer, see Figure 1. The craft beer segment continues to grow within the United States,

with now over 24 million barrels or 12.3% of all sales collected from craft brewers (Brewers

Association, 2017). Regional breweries produce the majority of craft beer, the IPA segment and



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its’ many sub-segments in the craft category account for over 25% of total craft volume. Craft

beer export in the United States experienced 16.3% volume growth totaling 446,000 barrels

worth $116 million in 2016.

B. Competition

The beer industry has historically been competitive with multiple players in the fast moving

consumer goods business. There exists many levels of competition within the robust industry and

as The Lagunitas Brewing Company continues to grow and expand, it is always attracting new

competitors. The competitors can be broken down as the local and regional brewers, national

brewers, and the international brewing conglomerates.

Lagunitas began as a small, independent brewery selling to local accounts in small geographical

footprint. Lagunitas has grown and matured, while many more breweries are following their path

in hopes of similar success. The number of operating US breweries in 2012 was 2,475. In 2016,

the brewery count surpassed 5,000 operating companies with another 2,000 in the process of

securing licenses and permits. Of these, 99% are small and independent craft brewers (Brewers Figure 2: US Brewery Count in 2016

Source: Brewers Association

Association, 2016). By comparison, there are 10,000 wineries in the US. Consumer trends

indicate that craft beer consumers in 2017 will value locally produced and independent brewers



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over quality as well as the historically significance and brand power of a brewery. The

competition at the local level is becoming over saturated with the growth beginning to

cannibalize each other all while continuing to chip away market share from the large brewers.

The second level of competition that Lagunitas faces are the national craft brands in the United

States. The major competitors at this level are Boston Beer (Sam Adams), Sierra Nevada, New

Belgium, Ballast Point, Goose Island, Oskar Blues, Founders, and Firestone Walker. These

brewers are, or are close to, national distributed with some beginning to export their beer to

Asian and European markets. The breweries range from 100,000 to 6,000,000 barrels of beer

produced a year; Lagunitas is the fourth largest brewer in this category. This level of competition

has been exposed to a wave of outside funding in recent years. External investors have included

the large international brewery community, private investment firms, other food and beverage

companies, as well a few employee stock ownership plans. Breweries that have secured funding

have been able to expand capacity and increase their sales force more rapidly than the majority

of other brewers.

Lagunitas is now on the international stage and therefore has gained the attention of the large,

international brewing conglomerates. Breweries like AB Inbev, Carlsberg, Diageo, Kirin,

Sapporo, and Asahi have all made plays in the craft beer market. Strategies range from acquiring

national and regional craft brands to creating new product lines within their existing product

ranges to compete with the rise of craft. Some breweries are actively attacking Lagunitas in

markets that Lagunitas currently operates in, while others are working to establish market share

in emerging craft beer markets. The focus of these efforts is to establish and educate consumers

on the IPA style and to create brand loyalty within the category. These competitors bring an

additional type of challenge to Lagunitas. The buying power of these brewers is tremendous. In

many markets they create duopolies with limited space for any other brewery. For example, in

Mexico, AB Inbev and Heineken now control over 90% of the total market or in Brazil where

AB Inbev alone controls 70% of the market share.These breweries have the ability to limit the

number of new entries by making the barriers of entry to high. Moreover, breweries are



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beginning to acquire pub groups to control the entire route to market for their products in some

key growth markets.

In the regions where Heineken is apart of such duopolies or holds significant market share, it will

be fairly easy to launch and build up the Lagunitas brand. Lagunitas sought out Heineken during

the beginning, which lead to the joint venture, because of market share they had in prominent

beer drinking countries. Countries like The Netherlands, France, and the U.K. have very strong

Heineken subsidiaries that control a portion, if not all, of the route to market. The markets with

the distribution channel should direct the initial international expansion for Lagunitas and build a

track record of success when looking to expand to markets with higher competitive barriers to

entry. They will use this success to build a business case when working to convince skeptical

markets where Heineken and craft beer do not have such strong roots to begin working with

Lagunitas.

C. Innovation

Across the entire market, beer drinkers are moving towards beer that skews to either the high or

low end of the beer spectrum. The trends for most markets show the shift away from the

traditional core lager range towards either premium beer options or the value-based brands. The

shift towards the high end side of the spectrum is occurring mostly in mature beer drinking

markets like Western Europe, United States, Brazil, and Australia (Rutishauser, 2015). Value

brands are becoming increasingly important in the retail segment of the market where price has

become the differentiating factor for most consumers. With this drastical change from the

decades old norm of lager drinking, breweries are competing to innovate in order to gain or

maintain a competitive advantage in the changing landscape.

To become an innovative company, breweries are reworking their businesses from the ground

up. First they must provide a platform for this innovation to grow. Next, they need to be able to

be agile enough to take the successful innovations and scale them rapidly to national and

international distribution. There are several innovations that have occurred in the past two to five

years that have resulted in gaining substantial market share.



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The addition of fruit, citrus, and other flavors became a popular trend in earnest in 2013 with the

release of Ballast Point Grapefruit Sculpin. Ballast Point saw an opportunity to build off the

success of their flagship brand Sculpin, by creating an entire product line of variants. Subsequent

releases included Pineapple Sculpin and Habanero Sculpin as well as other beers featuring

mango, orange, peppermint, and watermelon flavoring. Riding off the innovation of Ballast

Point, many more breweries quickly followed with their own fruit releases. The beer industry has

welcomed this innovation with open arms even listing this as a new category in many

international beer competitions.

A second innovation within the alcohol industry in recent years has been the emergence of

beverages that go beyond the classical definition of beer. In an attempt to reach a larger customer

base, breweries are innovating with malt flavored beverages that they can release on a large

scale. Such innovations include many “hard soda” varieties like root beer with an alcohol content

of around 5%, equivalent to standard beer. Another innovation in this category are “hard seltzer

waters” that are marketing as low in calories and also have the ability to mix with spirits. All of

these innovations have worked towards disrupting the current beer space and making it more

competitive to gain market share at the local retailers’ shelves.

A final innovation that has seen a shift in consumer preference has been the proliferation of non-

alcoholic beverages replacing the standard lager selection. In an era where drinking responsible

is applauded and there's public outcry in regards to drunk driving; breweries are embracing the

switch to lower and zero alcoholic beverages. Major brands like Carlsberg and Heineken have

released 0.0% variants on their classic lagers in the past few years with many craft brands

following suit. European craft brewers, Brewdog and Mikkeller both have non-alcoholic

offerings that are now available in multiple countries.

The degree at which these innovations are taking place vary from region to region and is why

Heineken felt it necessary to bring an American craft brewery into its’ portfolio. Lagunitas has

been constantly innovating in the IPA sub-segment of craft beer for the past two decades. From



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releasing a peach beer in the 1990’s to their secondary flagship, a wheat IPA.

Heineken/Lagunitas will be able to capitalize in regions where the consumers have an increased

interest in this innovation by being first to the market with an American IPA.



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IV. Literature Review/Underlying Theory

In this research, I will reference different areas of literature, theories, frameworks, and authors

that are relevant to the research question. The frameworks and theories are summarized into

three sections; the internationalization process, foreign direct investments (FDI), and the

business of operating as a subsidiary.

The first element of the research is the process at which companies go about attempting to

become a global player in their industry. This section brings together theories and frameworks

relating to understanding the initial desire to go international, the stages of internationalization,

the liability of foreignness, and the idea that “distance still matters.” It is relevant, as it will help

understand the international industry in the current era. The focus is on the problems and hurdles

firms face when leaving the comforts of their home markets. Furthermore, it explains what

companies can do to mitigate costly mistakes when deciding when and where to export and

expand their global footprint. The section concludes with the CAGE framework, a

comprehensive tool to understand what markets to enter and which to avoid based on four

different distance dimensions.

The progression of research continues as we learn about the different modes of entry and the

determinants that guide this decision making process. The section first seeks to define and to

understand the multiple options the firm has when deciding on the type of foreign direct

investment that is best for that specific market. Second, the research dives into the multiple

theories that attempt to represent the reasoning behind choosing that particular mode of entry.

These theories are important to help focus in on what the important considerations that need to

be thought of before the decision is made. The theories take many different approaches at

illustrating the factors that the firm should be focusing on, but taken as a whole they provide the

comprehensive knowledge that is needed to make the correct decision. The final theory lays out

the useful and easily applicable OLE Eclectic framework, a tool to measure the value added by a

FDI based on three advantages it provides to the business.



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The last section of the research dives into the “business of doing business” as a subsidiary. The

section first sets out to understand what are the key roles and expectations of a subsidiary from

the viewpoint of a multinational corporation (MNC). Drawing on the research from the past fifty

years, the review will work towards the focus of knowledge flow and transfer between parent

and business unit. It is important because we must understand the different methods that allow

knowledge to flow as well as the effects on subsidiaries when that flow has slowed or even

stopped. The research also looks into the control of flow and why some subsidiaries are

successful as a result of this knowledge transfer while others find themselves on the outside.

Finally, we look into the pros and cons of subsidiary initiative. Of specific importance is how a

subsidiary can contribute to the overall performance of the MNC as well as the limitations the

subsidiary may face when trying to initiate activity.

Part I: The Internationalization Process

A. The Strategic Choice of Internationalization

There is no one agreed upon definition of internationalization, however it is commonly thought

of as the increase in involvement and business in international markets. The decision to grow

outside of a firm's’ home market is based off its’ ability to manage the complexity and

uncertainty that comes with cross border activity. These activities bring new challenges

including political and currency based risk's as well as variations in everything from institutional

and ethical business practices.

The success of businesses that want to go the international route relies on their willingness to

think from a global perspective as well as understanding the variations in international cultures

that lie ahead. If the company has this vision in place, then it is possible that internationalization

is the correct strategic choice for the business. The business must have control and drive in terms

of innovation, keeping a high standard of quality, best business practices, and also seek out to

participate in corporate social responsibility (CSR) programs in every new market they enter.

There are many factors that go into the strategic choice of moving into the realm of the global

marketplace, the following sections will outline tools and methods to help steer a business

through all of the uncertainty that lies between the present and future success.



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B. Uppsala Model

The first theory on which the company project relies on is the one developed by Jan Johanson

and Jan-Erik Vahlne in 1977 at respectively, Uppsala University and Gothenburg University.

The Uppsala model has become the benchmark tool in understanding the internationalization

process of companies. Therefore, it is important to start here to first learn about the

characteristics of the process and the underlying reasons for this approach to global expansion.

Even though the theory was based off business practices from forty years ago, there are valuable

lessons to still be learned from the structure of their research.

Before Johanson and Vahlne published their study, the established economics and international

business literature at the time stated that firms choose, or should choose, the ideal mode for

entering a foreign market by analyzing their costs and risks based on market characteristics and

taking into consideration their own resources (Hood & Young, 1979). The two Swedish

researchers struggled to accept these theories explaining the process of internationalization. The

researchers believed that cultural differences were being ignored and did not focus on the foreign

investment needed to set up internal controls for internationalization. As a result, they developed

their own model that laid out internationalisation into four sequential steps leading up to

globalization. The steps are:

● Step 1: No regular export activities (sporadic export)

● Step 2: Export via independent representative (export modes)

● Step 3: Establishment of a foreign sales subsidiary

● Step 4: Foreign production/manufacturing operations

The model states that most firms begin internationalization via impromptu or makeshift

exporting where available and willing. If successful, the firm then attempts to formalize these

agreements by contracting intermediates or agents that are familiar with local markets. As sales

improve and diversify, the company can replace the agents with their own sales organization and

as sales continue to increase they will finally begin manufacturing in the foreign market. This



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Figure 3: Uppsala Model of Internationalization

Source: Johanson, J. & Vahlne, J.-E. (1977)

dimension of the internationalization pattern is referred to as the “establishment chain”

(Johanson & Vahlne, 2009). Another aspect of the Uppsala model is that organizations typically

choose foreign markets that are close to the home market in terms of “psychic distance,” or

factors making it easier to understand and operate in that specific market. Once the company

enters the markets that are psychologically close they will then gradually move outwards basing

decisions off firm-specific advantages relating to the liabilities of the new market, known as the

“liability of foreignness” (Hymer, 1976).

Finally, it is important to understand the assumptions that were made in creating the Uppsala

model. The underlying assumptions of the 1977 model are uncertainty and bounded rationality.

Firms make decisions based on experiences, and as they learn from these experiences they

becomes less uncertainty, Additionally, when large commitments are made in foreign markets,

companies become dedicated to making sure they meet customers ongoing needs.

C. Liability of Foreignness

The liability of foreignness concept was first introduced by Stephen Hymer in 1976. Hymer

observed new entrants to be at a disadvantage compared to local firms due to the uncertainties



23

and risk exchange with the business conditions in a foreign market. He studied the choices of

firms to either “make” or “sell” their proprietary knowledge, that is to say they would either have

production subsidiaries or license out the work to a local firm. Naturally, if the firms that

attempted to “make” their goods in a foreign market did not engage in learnings beforehand, they

would face a high liability of foreignness on the outset (Hymer, 1976). However, Hymer did not

discuss how firms reduce their liability of foreignness.

An empirical study by Zaheer and Mosakowski in 1997 suggested that liability of foreignness

would diminish over time. These learnings were especially important when firms were

determining the costs of investing in a foreign market. Firms should not consider the costs of

doing business abroad as static costs, but rather as declining costs as the firm gains more

knowledge and experience in the market (Zaheer & Mosakowski, 1997). The Uppsala model also

provides suggestions on how to reduce liability of foreignness based on the establishment chain

and the psychic distance as mentioned previously.

The research conducted by Petersen and Pedersen in 2002 helps better explain how firms can

reduce liability of foreignness based off the different learning engagement paths their managers

choose. It is the argument of this study that as a repercussion of managerial decisions, such as

unwillingness to undertake local changes for products and marketing as well as the adoption of

standardized international business practices, that firms will have a low learning engagement.

Firms can conceivably improve their ability to learn through experiences, in essence, they can

learn how to learn. However, even more important than the ability to learn, is the managerial

decision of the effort to want to learn. If the firm has a desire to engage in learning, this can take

place either before (pre-entry) or after (post-entry) the entry. The three learning engagement

strategies that are outlined by Petersen and Pedersen in Figure 4 and are related to (1) the

perceived familiarity of the foreign market, and (2) the time of doing business in the foreign

market. The result of the study finds that the firms’ decision in learning engagement has a direct

effect on the time and cost of the liability of foreignness it will experience during their



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Figure 4: Learning Engagement Strategies

Source: Petersen and Pedersen, 2002

internationalization process. In the case of engagement in pre-entry learning, the familiarity with

the foreign business is expectedly high while in post-entry learning, the initial familiarity will be

low. The key takeaway is that in the case of low, or no, learning engagement is that the firm will

remain unfamiliarized and continue to struggle with a high liability of foreignness (Pedersen &

Petersen, 2002).

Finally, there are few additional ways to decrease the LOF and control high costs in regards to

emerging markets through risk mitigation. The three controls or procedures are (1) forgoing

short-term profits in favor of long-term reputation, (2) avoiding locations where compliance is a

moving target, and (3) vetting managers and subcontractors for a culture of compliance

(Hochberg, 2015).

D. CAGE Framework

Research lead by Pankaj Ghemawat in 2001 set out to understand why some companies have

failed so spectacularly at trying to expand globally due to the unforeseen high levels of liability

of foreignness. He recognized that companies consistently exaggerated the attractiveness of

foreign markets leading to costly mistakes and set out to create a framework can could be used to

have a more rational approach in deciding international opportunities. So how to avoid this fate?



25

Ghemawat says to look beyond the country’s sales potential (as expressed by GDP or consumer

spending) and assess the impact of distance.

The underlying message from his studies is that there is more than one dimension of distance and

that companies should not focus only on distance’s geographical dimension. The firm must

consider three other dimensions as well: cultural factors (religion, race, social norms, language);

administrative factors (colony-colonizer links, currencies, trading arrangements); and economic

factors (income, distribution-channel quality) (Ghemawat, 2001). Figure 5: CAGE Framework Distance Descriptors

Source: Ghemawat, 2001

The conclusion of this research is that the more two countries differ across all four distance

dimensions, the higher the liability of foreignness and therefore the riskier the foreign market is

to enter. On the other side, if the firm finds significant similarities along all four distance



26

dimensions, there is a great opportunity for success in the foreign market. Common currency, for

example, can increase likliness of trade by up to 300% (Ghemawat, 2001).

Part II: Foreign Direct Investment

According to the widely accepted Uppsala model for internationalization, as a firm matures in

foreign markets it must decide whether to implement their own sales and production units

abroad. At this decision-making point, the firm is already a multinational enterprise (MNE), that

is, it is engaging in international economic activity. In order for the MNE to continue to grow,

the business must do its’ due diligence and make its’ first foreign direct investment (FDI). A FDI

is the route to market for MNE’s by establishing or purchasing income-generating assets abroad.

These FDIs are motivated by “market seeking,” resource seeking,” “innovation seeking,” or

“efficiency seeking” tactics. How, why, and the route of entry for these firms is what is

important, as there are several options to consider when looking to participate in a FDI.

A. Joint Venture or Wholly Owned Subsidiary

A foreign direct investment is essentially an equity investment whether it be selling or buying

equity to enter the market. The result of this investment, among others, is the managerial control

that comes with ownership. There are other advantages that come with equity investments: the

internalization and protecting of assets, demonstrating strategic commitment to the market, and it

may also deter others from from also entering that space. The three primary modes of entry are

Greenfield, Joint Venture, and Acquisition. For the sake of this research, we will focus on joint

ventures and wholly-owned subsidiaries (acquisitions) and compare the two. The greenfield

mode for reference, is where a firm establishes a brand new subsidiary in a foreign market.

The definition of a joint venture (JV) is a business arrangement in where two or more partners

pool their resources together in order to achieve a goal or create something new. According to

James Foley’s 1999 work, there are five typical objectives of a JV: entry to foreign market,

risk/reward sharing, technology sharing, sharing of production and development, and assistance

in conforming to local governments (Foley, 1999). Joint ventures exist when their are similar

strategic goals while having limited competitive overlap. Typically in JV’s, company patents and



27

proprietary knowledge is not shared. Determinants that are the primary consideration for JV’s are

ownership stake, control stake, length and terms of agreement, pricing measures, as well as the

local firms resources and knowledge. All of these issues are built in contractually, ensuring that

the partners have a set understanding of expectations of the new venture.

Joint ventures are created from cash investment or a combination together with public capital or

leveraging bank debt. Joint ventures can when a local firm invests in a foreign firm or vice versa,

they also can be created by both local or foreign firms. The process of finding an ideal partner

can also be exacerbating. From screening prospects to creating a short list and doing to the

proper due diligence, this can be the most labor, time, and cost heavy part of the process. Finally,

a few problems that may occur during the venture: conflicts with unequal future investments,

profit sharing, mistrust, cultural issues, and the unpleasant conversation when it is time to

terminate the joint venture.

A wholly owned subsidiary (WOS) is a company that is completely owned by another company.

The owning company is referred to as the parent or holding company. In order for a company to

be a WOS, all common stock must be owned by the parent company. The subsidiary operates

under the direction and permission of the parent company. Typically, the subsidiary

differentiates from the parent company by having its own senior management structure, product

line, and own client base. Subsidiaries are sought out when trying to merge the gap of large

geographical business interests over multiple industries. As firms get larger, these tactics are a

proven way at hedging against specific political or economic shifts that negatively affect markets

and sectors.

There are many advantages for a company to fully acquire another business. The ability to

integrate administrative and financial teams as well asl implement an overall marketing strategy

across the businesses will greatly decrease operating costs. These savings are recorded as

synergies, synergies are a driving force behind many acquisitions. However, a parent company

may face issues when taking over an established, successful business. Working with current

leadership can be more complicated than implementing their own management team. Time will



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be the biggest obstacle, as transitioning and changing the mentality and standard operating

procedures of people is difficult. Another risk of acquiring a firm is the chance of paying too

much for assets especially after entering a bidding war. This risk is exemplified when dealing a

CEO is attempting to make an impact or leave a legacy. Figure 6: Mode of Entry Determinants

Source: Meyer, 2008

“Modes of entry allow firms to overcome different kinds of market inefficiencies related to both

characteristics of the resources and to the institutional context. In a weaker institutional

framework, JVs are used to access many resources, but in a stronger institutional framework, JVs

become less important while acquisitions can play a more important role in accessing resources

that are intangible and organizationally embedded” (Meyer, 2009). In general, ownership can be

considered as a means to conformity to both economic and cultural environments, or simply be a

business based conformity.

B. Theories of Entry Mode

As previously stated, the mode at which a firm decides to enter a foreign market is a crucial

turning point in the future of the company. There are a few options to choose from, which we

just went into detail into, but it is also important to understand the determinants that guide these

decisions. The idea of globalization is no longer so distant or too inaccessible, instead it is now

an inevitability in the progression of the firm's’ growth. So if the question is no longer if and

when, it is now focused purely on how to do it. The following sections will outline the theoretical

background on the most common determinants in entry mode. It is important to note that firms



29

using entry modes based off the predictions of theories perform significantly better than those

that do not.

i. Transaction Cost Theory

The most common theory regarding entry mode decisions originated with the economic work of

Williamson in 1981. The theory is based off whether a firm should “make” or “buy” its’ products

in a foreign market. In entry mode research, transaction costs are generally identified with the

three dimensions widely discussed by Williamson: asset specificity, uncertainty, and frequency.

The asset specificity is without a doubt one of the most crucial dimensions of the transaction. It

enables the company to fully comprehend whether the contract requires individually-tailored

solutions or quite standardised investments (Williamson 1985). This is the first test in deciding to

“make” or “buy”. It is understood that uncertainty exists throughout the decision making process Figure 7: Asset Specificity and Frequency in Entry Mode Choice

Source: Williamson, 1985

of internationalization, right now we will focus on the two types of uncertainty affecting entry

mode: behavioral and external . Behavioural uncertainty is the imperfect information firms have

when operating abroad as well as the risk that their partners may act in a way that is

opportunistic only towards themselves. External uncertainties range from economical to cultural



30

to political uncertainty. Finally, the frequency is in reference to the forecasted and contracted

upon sales volumes that can be expected in the foreign market. Simply put, if there is a high

repeatability of product being demanded in a market, the higher the chance for a FDI to take

place.

To summarize, the basic unit of research in the transaction cost theory, as stated before, is the

transaction itself (Mroczek-Dąbrowska, 2014). And using the three dimensions of the theory, a firm

can have a much better understanding of which entry mode to choose as seen in Figure 7 above.

ii. Resource-Based Theory

A second theory to analyze the determinants in entry mode options, is focusing on the strategic

resources a firm has, and if these provide a competitive advantage in the marketplace. The theory

was formalized by Barney in 1991 and states that a “firm's’ resources include all assets,

capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by

a firm that enable the firm to conceive of and implement strategies that improve its efficiency

and effectiveness” (Barney, 1991). The resource-based theory is best applied by asking questions

based on the VRIO framework that was also developed by Barney. The framework focuses on

asking four questions regarding each of the resources the firm believes provides a competitive

advantage to that market.

● The Question of Value: "Is the firm able to exploit an opportunity or neutralize an

external threat with the resource/capability?"

● The Question of Rarity: "Is control of the resource/capability in the hands of a relative

few?"

● The Question of Imitability: "Is it difficult to imitate, and will there be significant cost

disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?"

● The Question of Organization: "Is the firm organized, ready, and able to exploit the

resource/capability?" "Is the firm organized to capture value?" (Barney, 1991).

Two additional resources that Barney didn’t explicitly state in his initial research are the

experiences a firm or members of the firm have gained as well as intangible resources. Intangible

resources include that under the umbrella of corporate intellectual property as well as goodwill



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and brand recognition. There is still a debate as to whether these intangible resources truly

provide a competitive advantage when deciding on entry mode.

iii. Institutional Theory

A third theory to gain knowledge on the determinants of entry modes for firms focuses on the

institutional factors of business. The theory can be traced back to Douglas North’s 1990 book in

which he states that “institutions are the rules of the game in a society or, more formally, are the

humanly devised constraints that shape human interaction” (North, 1990). Therefore, the

institutional theory is heavily based upon the limitations, laws, and legal statutes that have been

created by politicians and businessman in previous generations. From an opposite viewpoint, the

institutional theory can be used to examine the opportunities in a market. “Institutions, together

with the standard constraints of economic theory, determine the opportunities in a society.

Organizations are created to take advantage of those opportunities, and, as the organizations

evolve, they alter the institutions” (North, 1990).

When firms are determining what entry mode to use it is critical to make sure that their

organization is built and operates in a manner that will be cohesive with the targeted foreign

market. “Although formal rules may change overnight as the result of political or judicial

decisions, informal constraints embodied in customs, traditions, and codes of conduct are much

more impervious to deliberate policies.” (North, 1990). The theory states that learning and

understanding the cultural and social traditions of a market are as important as being aligned

with the formal laws that govern the business environment. To recap, the institutional theory is

applied when firms are typically entering markets that do not have similar “rules of the game,”

making these constraints the largest barrier to entry.

iv. OLI Eclectic Framework

The OLI Model or Eclectic Framework was developed by John H. Dunning in 1979 as further

academic development in the understanding of the internationalization theory. The framework is

split into three distinct advantages of deciding whether to proceed with a FDI, and only if all



32

three provide to be truly advantageous should the confirm proceed with the investment. The

three elements or advantages are ownership, location, and internalization. Figure 8: OLI Framework

Source: Dunning, 1979

The ownership advantage states that in order for a firm to own an asset in a foreign market the

asset must generate enough profit to outweigh the extra financial and emotional costs of

multinational production. Some examples of ownership advantages include patents and

ownership rights, innovation capacity, accumulated experience, and exclusive access to certain

inputs. The more the ownership advantages are possessed by an enterprise, the greater the

likelihood that the enterprise, given the incentive to do so, will engage in international

production (Dunning, 1979).

The location-based advantage is rooted in the very nature of why a multinational is created in the

first place. In order to be doing business, with physical assets in place, means that their most be

some advantage of being there. A great example of a location-based advantage would be the



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saving on transportation and tariff costs, also known as horizontal foreign direct investment,.

This is especially important for products that are difficult to ship due to weight, climate control,

or shelf live. Another example of a location-based example is the variability in production costs

from one country to another, which can be considered vertical foreign direct investment. The

price for low-skilled labor fluctuates from region to region.

The internalization advantage states that there must be an advantage to keeping the expansion

internally or within the firm, opposed to licensing or outsourcing the work to a local firm. If the

firm's’ core competencies are easy to copy or the production procedure is simple to replicate, it is

advantageous for the firm to protect their patents. A second example of an advantage would be

the cross-boundary differences make it difficult to negotiate and create contracts. In this instance,

it can be more efficient to produce yourself and avoid any sort of hold-ups.

Part III: Subsidiary Operations

The past five decades have provided a substantial amount of research into the roles and

relationships between parent companies, or headquarters, and subsidiaries based around the

world. The focus of this research has varied over time placing importance at different elements

as globalization has evolved. Figure 8 shows the five dominant themes over time: (1)

organizational design and control systems; (2) home and host country context; (3) subsidiary

roles and regional structures; (4) knowledge creation and transfer; and (5) expatriate

management and global human resource management (HRM) (Kostovo, 2015). As depicted in

Figure 8, the focus has shifted to subsidiary roles as well as the creation and transfer of

knowledge with the larger corporation. For this section of literature, we will focus on these two

elements to better understand how a firm can succeed as a subsidiary in the modern business

environment. Additionally, we will look into the current research at how subsidiary initiative is

viewed and the roles it plays in the opportunities and threats for the business unit.



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Figure 9: Subsidiary Research over Time

Source: Kostovo, 2015

A. Knowledge Flow

One of the great advantages of having a parent company is the ability to access the knowledge

and experience from its’ vast learnings. The flow of knowledge from a multinational corporation

(MNC) to a subsidiary can be recognized as intangible assets. Typical downstream or traditional

knowledge transfers include sales, services and assembly while more recent flows are that of

R&D and strategic marketing campaigns. Knowledge flow is critical for subsidiaries that are

entering new markets or new industries as it gives them a competitive advantage with the

potential to be the first to market or first to penetrate the market effectively.

Growth, synergies, and innovation all stem from the collaboration and sharing of knowledge.

The flow of knowledge is crucial to the success of a MNC and in order to make the flow

effective they must champion the three issues with knowledge: acquiring the information,



35

coordinating its’ dispersal, and finally the motivation for units to share this knowledge. If

knowledge is considered a one way path with a source and a receiver then we can identify four

separate ways knowledge can flow based on the research by Mudambi and Navarra in 2004.

Flow 1: Flows from subsidiary to parent. These flows may be called knowledge transfer and

form the basis of the MNC’s network leverage.

Flow 2: Flows from location to subsidiary. These flows consist of the subsidiary’s learning, local

competence exploitation, and local resource utilization. This is the pod or ‘listening post’ role of

the subsidiary.

Flow 3: Flows from subsidiary to location. These flows are part of what have been termed

spillovers. Spillovers include both intended and unintended elements , for instance the local

adaptation or imitation could be considered an unintended spillover of knowledge.

Flow 4: Flows from the parent (and other MNC units) to the subsidiary. This knowledge flow

from the parent to the subsidiary is the traditional flow, where the subsidiary exploits a home-

base knowledge advantage (Mudambi and Navarra, 2004).

As we can see, subsidiaries are involved in every step of the knowledge flow. Therefore, how

they manage this flow will have a direct effect on their performance within the MNC. The degree

at which subsidiaries obtain and utilize this knowledge will be analyzed in the next section.

Recent trends point at increasing responsibilities for individual subsidiaries along with the

dispersal of knowledge from within the MNC turning these MNCs more into political coalitions

than the formal military formations of previous years (Holm, 2000). The new political

environment has resulted in some interesting power related side effects that have been studied in

depth. The division of subsidiary power is at the crux of the issue with rent-seeking subsidiaries

constantly at battle for power while other subsidiaries experience isolation and outsidership.

Both types of subsidiaries are important to understand to grasp the essence of subsidiary

behavior. The access to and ability to participate in the act of knowledge flow is a key factor in

the bargaining power of many subsidiaries. Therefore, it is likely that the occasional subsidiary

manager will attempt to exploit this power to pursuit achievements that benefit themselves in the



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Figure 10: Knowledge Flow

Source: Mudambi & Navarra, 2004

classic principal-agent paradigm. Managers can both aim to be profit seeking, maximizing

shareholders’ value in the firm, as well as rent seeking, profits earned by the MNC, but available

in transfer to individual subsidiaries. “Thus subsidiary strategic independence, designed to

enhance the competitiveness of outputs (market knowledge) and inputs (asset-seeking and

learning), can be corroded when the pursuit of subsidiary objectives encourage rent-seeking”

(Mudambi and Navarra, 2004). Rent-seeking subsidiary managers can be a drag on corporate

performance as the opportunism behavior will destroy value for the firm. However, it is

important for firms to earn rent as that allows for them to receive this knowledge flow, which in

turn provides them with bargaining power. One particular way for a firm to maintain a high level

of rent is by controlling a significant share of a corporation's R&D budget and focus,which can

be consider the firm’s ‘crown jewels’.

While some subsidiaries are fighting over the majority of the available profit rent and receiving

the bulk of the knowledge flow, there are as many subsidiaries that are suffering on the other side



37

of spectrum. These firms are experiencing what Johanson and Vahlne have referred to as liability

of outsidership. But how does a firm find itself on the outside, isolated from the inner workings

of the parent company? The research conducted by Monteiro et. al in 2008 concludes that

isolation is a direct effect of the ability of the subsidiary to be involved in the MNC's knowledge Figure 11: Subsidiary Capabilities Affect on Knowledge Flow

Source: Monteiro, 2008

flow. They found that “knowledge flows from units that are perceived to be highly capable to

units that perceive themselves to be highly capable. Knowledge flows are also associated with

existing levels of communication and reciprocity” (Monteiro, 2008). So the research indicates

that subsidiaries that are skillful and successful, or the “in crowd,” routinely participate in the

transfer knowledge while the less capable subsidiaries are left in isolation. The key takeaway

from this research, is that there is a link between the evaluation of capabilities (both by the

source and the receiver) and the expectation of receiving knowledge. It is also interesting that

these MNC’s allow this isolation to occur, as these outside subsidiaries typically underperform

and bring down the overall performance of the business.

Subsidiaries are becoming more important as MNC’s look to expand globally and it is important

that they manage and maximize all of their units to the best of their ability. The business

environment is also viewed as a web of relationships, a network, rather than as a neoclassical

market with many independent suppliers and clients. Finally, it is critical to remember that



38

“outsidership, in relation to the relevant network, more than physical distance, is the root of

uncertainty” (Johanson and Vahlne, 2009).

B. Subsidiary Initiatives

Besides the knowledge that the firm brings to the MNC, it is also expected that the subsidiary

contribute in other ways via firm-specific advantages. Firm-specific advantages used to be the

concern of only the MNC, the mentality is shifting towards more of a collective responsibility in

which, subsidiaries should have firm-specific advantages that allow them to improve the overall

performance of the MNC. Additionally, “rather than simply seeing subsidiaries as contributors to

the development of firm-specific advantages, research shows that they can also drive the process

through their own initiative” (Birkinshaw, 1998). Figure 12: Subsidiary Resources and MNC’s firm-specific advantage

Source: Birkinshaw et. al, 1998

The research indicates that there are three key determinants in order for the subsidiary to have a

productive impact through initiative and a significant relationship and contribution with the

parent company. The successful elements according to Birkinshaw et. al are “(1) internal

subsidiary resources in combination with initiative have a strong positive impact on the

subsidiary’s contributory role; (2) subsidiary initiative is strongly associated with the leadership

and entrepreneurial culture in the subsidiary; and (3) contributory role is strongly associated with

subsidiary autonomy and a low level of local competition.” Developing the third element more

gives us a great insight into two dynamic characteristics of a successful subsidiary. First, that

autonomous subsidiaries thrive, is a follow up on the notion discussed earlier that subsidiaries

that view themselves as capable and proactive will be more successful. The second fact is more



39

insightful perhaps stating that the location and the local competition, if ideal, will lend itself to

becoming a more effective contributor within the MNC.

We are now in a position to draw on the realization that subsidiary initiative starts within the

subsidiary itself through effective management and utilization of specialized resources. The

ability to operate autonomously is based on the trust and proven track record of the leadership

team. The executive group must use their resources to provide opportunities for the subsidiary to

achieve international responsibilities (Crookell, 1986). By initiating these opportunities, the

subsidiary will be able to start having a diverse role set including manufacturing, product

development,strategic marketing campaigns, and an independent sales structure. This subsidiary

initiative will also lead to better visibility within the MNC, which can lead to more rent space

and access to capital.

It is crucial to understand that subsidiary initiative may also not be well received within the

MNC. MNC’s often want complete control over their organization and only expect individual

business units to execute as ordered. Another aspect that may not be first thought of is the thirst

for acknowledgement from parent to subsidiary and what these units need to achieve to quench Figure 13: Process Model of Subsidiary Activities and Resources

Source: Birkinshaw et. al, 1998

that thirst. The most interesting finding by the research of Ambros et. al in 2010 is that influence

is achieved only if subsidiaries are granted headquarters’ attention – no direct relationship

between initiatives and influence could be established. This finding points to the critical role of

headquarters in the initiative process. Initiatives have only an indirect effect on subsidiary

influence. Thus subsidiary managers need to build a reputation for their unit at headquarters, and



40

use internal marketing mechanisms to increase their chance of legitimizing their initiatives. The

finding also underlines the dilemma that subsidiary managers face when they undertake strategic

initiatives, as they jeopardize their gained autonomy by evoking headquarters’ monitoring

(double-edge sword). Headquarters’ response does not only shape the dyadic relation with its

subsidiary but also defines the subsidiary’s influence in the MNE (Ambos, 2010).



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V. Methodology

The research methodology for this project was designed to have both qualitative and quantitative

components. The qualitative research was conducted using the literature review, the interviews

that were formally arranged, as well as first hand experience working in the office and

interacting with the general staff. On the quantitative side of the research, both academic data

was collected from universities from around the globe as well as reports generated internally and

some coming from high profiled consultancy firms. The goal of the research is to understand the

industry and the business challenges facing Lagunitas, then to use frameworks of preexisting

theories to gather insights and recommendations into best practices going forward.

The internal analysis included working with the European Sales Manager and the Vice President

of International, who were asked to be the subject of multiple interviews as well as provide

additional information. The one-on-one interviews were held in a semi formal structure, typically

over coffee in their office or work space. The company strategy was discussed as well as the

internationalization strategy that was pre-existing for Heineken. Two brainstorming sessions

were held after the literary research was complete, to discuss further the direction and approach

to globalization. Finally, field visits were made to learn how the sales team worked in the market

and how they were already interacting with the Heineken sales team.

The second part of the internal analysis was the combination of gathering information and data

provided by Lagunitas and the desk work needed to work through it all. The data that was made

available included industry overview of select markets, Heineken position, organizational

structure, and maturity in select markets, Lagunitas core competencies and future goals taking

into consideration, all to be able to determine how, where, and when Lagunitas should accelerate

their expansion plans. Lagunitas needs to provide a unique value for Heineken, without directly

competing with the current business model and portfolio in order to realize the gains from this

acquisition.



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VI. Managerial Recommendations

The main deliverables of this project for The Lagunitas Brewing Company, as stated previously,

are a set of recommendations and strategy, based off the literature review, to assist in the

transition into a subsidiary role. The recommendations should also provide guidance into the

future expansion plans into new, foreign markets. The deliverables are:

• Regional entry mode selection strategy;

• Guidelines of how operate as a wholly owned subsidiary and

• Set of recommendations for maximizing and leveraging knowledge of parent company.

Before Lagunitas was fully acquired by Heineken, the companies operated as a joint venture for

two years. Therefore when the complete buyout took place, Lagunitas was prepared and ready

for further integration. The company, in some areas, is already well underway in finding

synergies and maximizing the access to new information. As two companies continue to synch,

the information flow will became more and more frequent, both in quantity and quality. It is

important that Lagunitas be well advised on how to manage the upcoming endeavors. In terms of

timing, this research and report comes at an opportunistic moment and hopefully be utilized for

the future of the company.

A. International Growth Strategy

Lagunitas is going to experience a catalyst of growth internationally with the support of

Heineken, so it will be important to control this growth with a developed strategy for expansion.

An accelerated, segmented rollout internationally is the pre-existing recommendation from

Heineken, and the literature review defends this strategy. Lagunitas needs to identify the

opportunities as well as the motivation from each region to decide where to introduce their

products first. Even though it is recommended to use Heineken importers and distributors where

available, it might not be beneficial to use the same approach in every country. There are three

different rules of entry mode selection, introductions into foreign markets, based on Hollensen’s

research in 2016:

• The Naïve rule where the company uses the same entry mode for all foreign markets.



43

• The Pragmatic rule, the company uses a workable entry mode for each foreign market

depending on the time stage or the business stage. As the first step to international business,

companies tend to use exporting.

• The Strategy rule, where the company systematically compares all of the entry modes and

evaluates the value before any choice is made. An approach common in large firms, because the

research requires resources, capital and time. It is rarely to see a small or medium-sized company

use this approach. (Hollensen, 2016).

For Lagunitas, the shift to a pragmatic approach towards the strategy rule is recommended. The

brewery can now operate like a large firm with the new access to resources and capital. The

market reports and industry profiles that have been generated and catalogued by Heineken can

now be used by Lagunitas. Along with this, additionally labor capital is being invested in the

Lagunitas international expansion. The company now has the capacity to evaluate all entry

modes in order to make an educated choice. By doing so, Lagunitas will gain another sustainable

advantage over competitive craft brands.

Lagunitas can also jump forward in regards to what step they enter a market according to the

Uppsala Model created in 1977 by Johanson and Vahlne:

• Step 1: No regular export activities (sporadic export)

• Step 2: Export via independent representative (export modes)

• Step 3: Establishment of a foreign sales subsidiary

• Step 4: Foreign production/manufacturing operations

Up until one year ago, Lagunitas was no further than step 2 in any of the foreign markets where

they were doing business. Only four countries had identified and contracted official importers

that represented their products in the market. A handful of other markets were receiving sporadic

export product and were not showing much potential for growth or opportunity. Lagunitas no

longer should enter below step 2 in the model, signing distribution contracts with Heineken

subsidiaries in any new market they enter. It markets that are earmarked as high potential, it is

recommended that Lagunitas enter a market simultaneously, or even better, only after a sales



44

subsidiary is established. The advantages of having the access to capital and resources will make

implementing a sales team feasible for the launch of the brand. The craft beer market moves

quickly, with preferences and brand loyalty low, so Lagunitas needs to quickly seize and

maintain market share.

It is also recommended that Lagunitas set into place a long-term strategy that includes the future

creation of a foreign production facility. This is the final step in the Uppsala Model and will

allow Lagunitas to gain additional sustainable advantages. Not only will a foreign production

facility provide savings in freight and procurement, it will decrease the liability of foreignness.

The company needs to take into account all four of the distance dimensions when choosing

which markets to enter. As Ghemawat discovered, distance factors can be geographical, cultural,

administrative, and economical. Factors that Lagunitas should take into account are listed in

Figure 14. Figure 14: Lagunitas CAGE Factors

Lagunitas CAGE Factors to Consider

Goegraphical Cultural Administrative Economical

• Adequate transport • Ease of

communication • Border/trade

• English Language • Social drinking

accepted • Willingness to

buy foreign

• Currency • Alcohol laws and

regulations

• Expendable income • Cost vs quality

preferences

Using these factors, we can better recommend what regions Lagunitas should begin looking at in

regards to further expansion. Since the company is looking to rapidly expand the best way to

outline the strategy is through a regional, phased plan. Figure 15 illustrates the controlled rollout

in detail below. Phases of expansion include a fast-tracked approach to completing the

distribution footprint in Western and Northern Europe. Southeast Asia and the Pacific should

follow as the consumer preferences are leaning towards high-end product and there is also the

presence of expendable income. Next includes Central America and select South American

countries, specifically the up and coming Brazilian market. The recommended path has high

ambition, but also high reward if the launches first three years prove to be successful. Included is



45

also the recommendation for a foreign production facility to placed in the United Kingdom due

to the lack of distance between U.S. and U.K. beer markets and consumers. Figure 15: Lagunitas International Expansion Strategy

Lagunitas International Expansion Strategy

Home Market Current Export Phase 1 Phase 2 Phase 3

• United States • Canada • Mexico • Puerto Rico • UK (Future

Production) • Ireland • Sweden • Denmark • Norway • The

Netherlands • France • Spain • Italy • Japan • New Zealand

• Finland • Germany • Belgium • Switzerland • Austria • Luxembourg • Czech Republic • Poland • Estonia • Latvia • Lithuania • Russia

• South Korea • Hong Kong • Taiwan • China • Vietnam • Thailand • Singapore • Malaysia • Australia

• Puerto Rico • Jamaica • Dominican

Republic • Costa Rica • Panama • Guatemala • Columbia • Argentina • Brazil

B. Recommendations for Subsidiary Survival

In the literature review we learned that subsidiaries operate in two separate, but connected

business worlds. They must survive in the global marketplace, where competitors exist in ranges

of size, success, and location and are always working to beat you in foreign lands. The subsidiary

also is constantly competing in an internal marketplace that is invisible to the general public. In

the constant search for their parent company’s resources, subsidiaries can become rent seeking

by looking to improve the individual business unit at the expense of the overall MNC’s

performance.

It is important that Lagunitas demonstrates initiative towards the integration and transition period

with the goal of being visible in the corporate system. The eventual synergies that will be gained

for the partnership should be realized as soon as possible. The research recommends that

Lagunitas should initiate some of these processes. By showing the willingness to adapt or adopt



46

to some of the parent company’s programs and policies, they exhibit the inclination to conform.

One program worth reaching out to gain access too, is the transportation and logistical

infrastructure built within Heineken. The MNC has agreements with freight and logistic

companies that ensure better rates on shipping due to the purchasing power of Heineken.

According to Crookell in 1986, the executive team must use the resources available to them to

provide opportunities for additional responsibilities. If Lagunitas can start applying these freight

procedures within the craft segment, Lagunitas could eventually take on a larger role, managing

the international logistics for all new craft brands at Heineken. These cost savings can also help

bring down the retail price making the beer more attractive to a larger consumer base providing

yet another advantage to the subsidiary.

Another initiative that this study would recommend would be the collaboration with between

sales forces. By referring back to the literature review, the learnings state that in order to gain

knowledge from a parent company, a subsidiary must evaluate not only the MNC capabilities is

high, but equally important, is viewing themselves as very capable (Monteiro, 2008). The

Lagunitas sales team needs to recognize that they can bring their expertise of the craft beer

segment as well as building a brand organically, without the benefit of a marketing budget.

Heineken can bring their knowledge and relationships with the large venues and chain accounts.

They can also help assist with the creation of complex corporate agreements. The most efficient

way to grow sales, and in turn receive attention, is through the development of these high volume

and highly visible contracts. See Figure 16 belove for a complete capability evaluation.

A final initiative that can improve visibility is the effective procurement and positioning of

Lagunitas employees around the global. Lagunitas should access the global relocation team at

Heineken HR to assist with the visa and work permit process in foreign countries. By having

their own sales team in place, Lagunitas will keep their brand in front of mind share through

consistent interaction with partners and consumers. Additionally, when applying the research by

Birkinshaw et. al in 1998, there is evidence that a subsidiary’s contributory role is strongly

associated with autonomy of the firm. The more Lagunitas can stay autonomous is the strong



47

they will be, and the best way to stay autonomous is continue to employ their own staff as they

expand across the globe. Figure: 16: Lagunitas Evaluation of Capabilities

Lagunitas Evaluation of Capabilities

Lagunitas Heineken (MNC) Other Subsidiaries

• Experts at the craft beer industry

• Understanding of US market • Champion of IPA • Innovation within segment • Own sales force • Technology and CRM built

for international growth

• Supply chain and logistics • Human resources, relocation

specialist • Experience and succsess in

growing international brands • Access to resources • Global marketing leader

• Knowledge of local markets and customer habits

• Connections with local suppliers

• Route to market

In order for Lagunitas to survive or even thrive within the MNC, they must begin to contribute

from the starting gate. Lagunitas was not acquired for the immediate financial gains since the

brewery will contribute roughly 1/200 of overall production in 2017. Therefore, it is the role of

the subsidiary to contribute with firm-specific advantages. Lagunitas must identify what makes

them specialized and leverage those skills and assets in order to improve their standings within

the company. This paper recommends that it promotes their strongest asset, Lagunitas IPA.

Heineken achieves success through contracts with the on-premise to be the exclusive provider of

beer available at draft. One reason restaurateurs choose to work with Heineken is because of the

diverse portfolio they offer. Lagunitas fills a void in that current portfolio. The Lagunitas brand

is synonymous with the IPA style, which as was shown above, is a style gaining traction in many

global markets.

A final recommendation for the survival for Lagunitas is to create and control an innovation

facility that allows them to drive research and development internally. The craft beer segment is

growing with innovation leading the way, as stated above. Lagunitas should position itself as the

innovative brand in the overcrowded portfolio of Heineken. Therefore allowing it to be carried as

a high profile brand in mature markets and more of a smaller, specialty brand in other markets.

No matter the volumes Lagunitas creates in each market, it will ensure it is part of the

conversation by highlighting differentiation. As the market continues to be competitive, large



48

companies will move more capital into innovation in order to maintain ahead of the competition.

A strategic way to guarantee visibility and above average funding is accessing the high budgets

for R&D in this industries of fast moving consumer goods (FMCG).

C. Priorities and Next Steps

The research was developed with the intentions of understanding and developing

recommendations based on the research questions:

● How should Lagunitas decide where and when to expand and what mode of entry to

choose?

● What are the key ways to actively initiate within a corporation and what are goals of such

initiatives?

● How to best access, optimize, and become apart of the knowledge flow in their new

parent company?

In conclusion, this research has shed light on many aspects leading to internationalization under

the role of a subsidiary in a multinational corporation. The research laid out a strategy that

should assist with the decision making process of expanding distribution and growing a brand

beyond the comforts of their home market. Theories were also presented about how to

successfully operate as a subsidiary, with recommendations of when and why they should show

initiative.

The conclusions for how Lagunitas should enter foreign markets was based on the reach of

Hollensen as well as Johanson and Vahnle. Since Lagunitas has the resources to analyze each

market separately, they can use the strategic rule and assess priorities markets and focus on these

first. They also do not need to necessarily start with sporadic exporting anymore, and can now

begin directly working with a regular importer or even with a sales team in place before launch.

A second main conclusion from the research pertains to the initiation that subsidiaries can take in

order to become visible to their parent company. Subsidiaries need to provide and participate

within the MNC to build a reputation and gain trust from its’ partners. By supplying firm-



49

specific advantages and resources they will gain rent, however they must not become rent-

seeking. The subsidiary must operate with the mentality of doing whatever is best for the larger

business. It is important to balance the drive and initiative of how the business was before being

acquired and playing by the rules of a new owner in order to achieve the same results.

The final conclusion from this research is the understanding of knowledge flow and how to

efficiently access this knowledge. Knowledge flow comes in many forms, and capitalizing on

these flows are the basis of why subsidiaries can be extremely successful. Receiving knowledge

from the parent company, but also from the locations in which they are doing business. The

sending of knowledge back to the MNC is also important. Therefore, Lagunitas must view

themselves with high capabilities to feel comfortable sending knowledge as well as requesting to

receive it.

Lagunitas is at a crossroads in their company history with many tough decisions in the

immediate future that will dictate where they eventually land in the global landscape of the craft

beer community. The company must executive their first wave of expansion perfectly, using the

academic learnings and real life experiences to guide their way. In doing so, Lagunitas will gain

trust within the Heineken organization that will hopefully lead to further integration. By offering

firm-specific advantages, like the Lagunitas IPA brand, the subsidiary should continue to be

visible and receive rent to continue the growth and maturirty of the overall business.



50

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