Master Thesis Contextual changes and charter loss

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Master Thesis

Contextual changes and charter loss

- A case study on a Polish subsidiary and its German headquarters -

University of Groningen

Faculty of Management and Organization

MSc International Business & Management

July 15, 2008

Master Thesis

Supervisor: Dr. C. Dörrenbächer

Co-assessor: Mr. F.A.A. Becker-Ritterspach

By

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PREFACE

Before you lies the master thesis that concludes my six years of Business Administration at the Rijksuniversiteit Groningen. The paper is the product of a period that started at September 1, 2007, when I began my research at “German Total” in Germany. The dynamics between the headquarters and the Polish subsidiary soon gained my interest and inspired me to chose this subject for the research.

At “German Total” I had a great and instructive time, for which I would like to say thanks to all my colleagues that work there. Thank you for your support and help during my internship. I would also like to thank the interviewees for their time and their helpful insights and information. I am very thankful for the opportunity to perform my case study here. But most of all, I would like to express my gratitude to my supervisor at German Total, who has spent many time and effort in reviewing previous versions of this paper and with whom I shared the daily drives to “Buchen”. Thank you for the enjoyable rides and the great time at “German Total”!

My boyfriend, friends and family were a great help during the writing of this thesis. Thank you for your support and understanding and for all the reading that you have done.

I would also like to thank Mr. Becker-Ritterspach for his work as a co-assessor to this thesis. I really appreciate it that you were willing to help me out as a second supervisor.

Above all, I would like express my gratitude to Mr. Dr. Dörrenbächer for his time and help in supervising this thesis. With your valuable insights and comments during the process, you are a great contributor to the quality of the paper. Thank you for your patience in reading through all the previous, unstructured and chaotic versions of this master thesis!

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Contextual changes and charter loss:

A case study on a Polish subsidiary and its German headquarters

Chris Menken

Department of International Business and Management, University of Groningen

ABSTRACT

This paper focuses on the impact of contextual changes on subsidiary charter loss. In the theoretical part, two groups of change factors were identified: (1) Local environment factors and (2) MNC factors. In order to explain their role in the process of subsidiary charter loss, the subsidiary resources, and the related dependency situation between the

headquarters and the subsidiary, have been taken as intermediate factors. Building on this connection, charter loss can occur when changes in the contextual factors cause a depletion of the resource distinctiveness. Based on a case study, the paper reveals four

different resource categories, that vary in their vulnerability to contextual changes. It has been found that subsidiaries that mainly control resources that do not directly contribute to the headquarters’ core activities, or that are not flexible in adjusting to

changing contingencies, are particularly vulnerable to experience charter loss.

KEYWORDS

Subsidiary charters; charter loss; contextual change; subsidiary evolution; multinational corporations;

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TABLE OF CONTENTS

1. INTRODUCTION... 6

1.1 Introduction to the case ... 7

1.1.1 History German Total... 8

1.1.2 German Total Polska ... 8

1.1.3 Unipro... 8

1.1.4 Products ... 9

1.1.5 Organization chart ... 9

2. LITERATURE REVIEW... 11

2.1 Subsidiary charter demotion ... 11

2.2 Research gap ... 13 2.3 Research question... 13 3. CONCEPTUAL MODEL ... 15 3.1 Resource-based view... 15 3.2 Resource categories... 16 3.3 Resource distinctiveness... 17

3.4 Resource-based view at the subsidiary-level... 17

3.5 Resource dependency... 18

3.6 Contextual change factors ... 19

3.7 Local environment factors ... 20

3.7.1 Host country changes... 21

3.7.2 Changes in the competitiveness of the environment ... 21

3.8 MNC factors ... 22

3.8.1 Changes in the HQ strategy ... 22

3.8.2 Product developments... 23 4. METHODOLOGY... 26 4.1 Conceptual model... 26 4.2 Definitions ... 26 4.3 Aggregation level... 27 4.4 Data collection ... 28 5. CASE STUDY ... 30

5.1 Initial subsidiary charter ... 30

5.2 Charter developments... 32

5.3 Resources Zielona ... 36

5.3.1 Workforce ... 36

5.3.2 Quality ... 37

5.3.3 Plant and equipment ... 38

5.3.4 Flexibility... 39

5.3.5 Market access ... 40

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5.4 Contextual change factors ... 41

5.5 Local environment factors ... 41

5.5.1 Host country changes... 42

5.5.2 Rise of China... 45

5.6 MNC factors ... 46

5.6.1 Changes in the HQ strategy ... 46

5.6.2 Product developments... 47

6. DISCUSSION... 51

6.1 Impact of host country changes on resource distinctiveness... 52

6.1.4 Managerial expertise... 54

6.2 Impact of the rise of China on resource distinctiveness... 55

6.2.2 Quality ... 56

6.3 Impact of HQ strategy changes on the resource distinctiveness... 57

6.3.4 Managerial expertise... 60

6.4 Impact of product developments on resource distinctiveness ... 61

6.4.1 Quality ... 61

6.5 Summary of results... 63 6.6 Analysis of results ... 65 6.6.1 Completely lost ... 66 6.6.2 Highly impacted ... 66 6.6.3 Medium impacted... 68 6.6.4 Low impacted... 69

6.7 Changes in the resource dependency situation ... 72

6.8 Charter demotion... 74

6.9 Strengthening the resource position ... 75

7. CONCLUSION ... 76

7.1 Contributions ... 77

7.2 Limitations... 77

7.3 Recommendations for future research... 78

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TABLES AND FIGURES Tables:

Table 1: Overview of the German Total product groups ... 9

Table 2: Summary of findings on charter loss ... 13

Table 3: Summary of the initial subsidiary charter ... 31

Table 4: Charter developments phase 1 ... 32

Table 9: Final charter ... 35

Table 10: Summery of results... 65

Table 11: Summary of main conclusions... 71

Figures: Figure 1: Organization chart German Total ... 10

Figure 2: Conceptual model ... 26

Figure 3: Unemployment rate in Poland ... 43

Figure 4: Minimum wage development... 44

Figure 5: Exchange rate development Poland... 45

Figure 6: Share of NPD vs base assortment... 49

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1. INTRODUCTION

Boundaries between countries, societies, cultures and economies around the world become ever vaguer, while the rapid globalization and internationalization of business continues. Multinational corporations (MNCs) have become synonymous with these developments. They are characterized by the spread of value-added activities across countries worldwide. Subsidiaries became a symbol of this internationalization process and are still a common method of operating business across borders.

A subsidiary will be defined in this paper following Birkinshaw & Hood (1998; p.774) as “a value-adding entity in a host country.” By means of its foreign subsidiaries, the MNC can take advantage of national differences and high location flexibility (Dicken, 1994). The HQ delegates part of its foreign operations to a subsidiary. The responsibilities assigned to the subsidiary are laid down in a charter. Galunic & Eisenhardt (1996, p. 256) define the term charter as “the business a division actively participates in and has responsibility for.”

At the heart of a charter lie the subsidiary’s resources and capabilities (Birkinshaw, 1996). The resource-based view (e.g. Barney, 1991) offers worthy insights in the role of resources and capabilities and how they contribute to a firm’s competitive advantage and performance. The study for this thesis will take a resource-based view with the subsidiary as the unit of analysis. The distinctiveness of the subsidiary resources deserves special attention. The resource distinctiveness makes the subsidiary valuable for the headquarters (HQ) and the overall MNC. A high distinctiveness of the resources also means that the HQ will be more dependent on the subsidiary for those resources. Resource distinctiveness binds the HQ to the subsidiary.

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This thesis will study the impact of contextual changes on subsidiary resource distinctiveness. When contextual changes diminish the distinctiveness of a subsidiary’s resources and capabilities, the resource dependency of the HQ on the subsidiary will decrease consequently. This will enable the subtraction of a subsidiary’s responsibilities, leading to a narrower charter. Charter adjustments are therefore an important device for an MNC to operate and survive in its fast-paced international environment (Galunic & Eisenhardt, 1996).

The process of charter demotion will be the main interest of this paper. The fact that the resources and capabilities have such a direct impact on the depletion of a subsidiary charter makes the developments in the resources and capabilities the key element of this study. The main focus will be on the devaluation of the subsidiary resources and the changes in the subsidiary context that had instigated these.

By means of a single-case study, it is hoped to provide a better understanding of the process of charter loss. The case can provide a mechanism to capture how processes develop and offers an understanding of the dynamics that are present.

This paper starts with a study of the relevant literature that can provide an insight in the subject of charter demotion and loss. Secondly, by means of the literature on the resource-based view and on the subsidiary’s environment, a conceptual model has been developed. Then, the methodology will be explained. This is followed by an assessment of the case study following the structure that has been dictated by the conceptual model. Finally, a conclusion and a summary of the main findings will be offered. To start with, a background description of the case will be given.

1.1 Introduction to the case

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1.1.1 History German Total

German Total was founded in Leipzig in 1914 by Carl Baur. At this time, the only equipment was a sewing machine and a hand punch. Barely 25 years later, there were already 400 people employed at the company. In 1945 the company moved to Buchen, located in Baden-Württemberg in southwest Germany. Multiple investments were needed to keep pace with the growing production needs and the site quickly expanded. At this time, the only product the company marketed was LEMON, for the specialty trade. These products proved to be much sought after and already in the 1950’s the company started to expand their sales over the German borders and an international sales organization was developed. This has mainly been shaped internally by sales people, or coordinated externally by foreign distributors.

The current LEMON products are in nothing comparable to the products that were produced at the start of the company. Thanks to an active involvement in research and development and a great focus on the ever changing consumer needs, the company is able to constantly develop new and innovative products (German Total company website).

1.1.2 German Total Polska

The production of LEMON is very labor intensive and in order to stay competitive, the production was moved away in 1994 from the headquarters location Buchen, to Zielona in Poland, where the wages are lower. At this new location, production remained growing and nowadays, almost 600 people are employed at German Total Polska.

Recently, the Polish subsidiary is experiencing competition for its charter from German Total contractors in China. The background and the related issues will be discussed in further depth throughout the paper.

1.1.3 Unipro

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USA, while Unipro International is active in all other countries worldwide. The headquarters of Unipro International is based in Haarlem in the Netherlands. German Total belongs, due to its products, to the House & Care products division. The total number of employees working for Unipro worldwide counted 52.000 in 2007 and the company achieved a turnover in that year of over $11 billion (Unipro company website).

1.1.4 Products

Before German Total joined Unipro, they only sold LEMON. Unipro added the related product category APPLE JUICE to the German Total product portfolio. Both products are sold through the specialty trade. With the involvement of Unipro, German Total also became active in the retail channel. From then on, they started to bring the products LEMON and APPLE JUICE to the retail channel under the Unipro brand name that covers both product categories, FRUIT. Nowadays, LEMON and APPLE JUICE are both European market leaders and FRUIT is worldwide the number 1 brand in the retail channel.

An overview of the main differences will be given below in table 1.

Table 1: Overview of the German Total product groups

LEMON APPLE JUICE FRUIT

Type of product Textile, later also gel _{and molded products Liquids} Both

Type of production Labor intensive Capital intensive Both

Batch/continuous or

unit Unit production Continuous production Both

Sales channel Specialty trade Specialty trade Retail channel

(Source: Company information) 1.1.5 Organization chart

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Figure 1: Organization chart German Total

(Source: company information)

Unipro

Unipro Corporation Unipro International

Unipro Deutschland GmbH

German Total

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2. LITERATURE REVIEW

In previous studies on charter development, the main focus has been on the initial subsidiary role and subsidiary growth, leaving charter demotion outside the scope of the research. Few scholars studied the evolution process of foreign charter removals and subsidiary charter decline, with some noteworthy exceptions (Dörrenbächer & Gammelgaard, 2006a/ 2008; Benito, 1997; 2005; Simões, 2005; Birkinshaw & Hood, 1998; Birkinshaw, 1996; Galunic & Eisenhardt, 1996). These studies have devoted attention to the actors at play in cases of subsidiary charter loss and how these actors influence the process. This study will continue on this specific theme within the field of international business research, but will focus on contextual changes, an aspect that has been left unexplored until now. In the next paragraph, an outline of the main contributions and findings on subsidiary charter loss will be given.

2.1 Subsidiary charter demotion

A subsidiary’s activities can be distinguished in product scope, market scope and value- added- or functional scope (White & Poynter, 1984). A subsidiary charter is based on the scope of activities for which the subsidiary has been granted responsibility beyond its national market (Birkinshaw, 1996). Adjustments in the product-, market- or functional scope of the subsidiary, have been defined by Birkinshaw (1996) as charter development. Birkinshaw & Hood (1998) have defined this notion as “the result of an accumulation or depletion of capabilities over time (p.781).” The central role of subsidiary resources and capabilities is highlighted in this definition. It also acknowledges the possibility of subsidiary decline, which consists of “capability atrophy and charter loss (p.783)”. A reduction in a subsidiary’s product-, market- and/or value-added scope will be defined as charter loss.

Galunic & Eisenhardt (1996) found that charter loss can be related to the product life cycle theory. The conditions that trigger charter loss vary for each phase in the product life cycle, but the involvement of the focal subsidiary, other divisions and MNC managers were found to be consistent in each case of charter loss (Galunic & Eisenhardt, 1996).

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actors within the MNC network. The density of these relationships is impacted by the resources possessed by the subsidiary. Dörrenbächer & Gammelgaard (2008) found that the combination of a weak resource position and a low density of network relations make a subsidiary particularly vulnerable to charter loss.

Benito (1997) scrutinized the relationship between the HQ and the subsidiary and found that the lack of strategic fit between the HQ and the subsidiary can instigate charter removal. The complexity associated with managing the subsidiary and host country conditions were two other factors that came forward in his study and influence the probability of charter loss (Benito, 1997).

In another study, Benito (2005) focused on the role of the MNC strategy within the triad of actors. He finds that the MNC strategy has an influence in the process of charter demotion. MNC integration strategies for economies of scale and scope, or the quest for local adaptation can explain charter loss. Subsidiaries that were established with the purpose of gaining access to favorable local conditions are also vulnerable to charter demotion.

Simões (2005) also finds that the MNC strategy is a main trigger of subsidiary charter loss. The internationalization of MNC strategies and of the competitive environment play a dominant role in the processes leading to charter loss.

Birkinshaw (1996), on the other hand, placed the subsidiary characteristics, and the resources in particular, under scrutiny. He states that a subsidiary charter is based on its underlying resources and capabilities. When the subsidiary resources change over time, the role of a subsidiary within the MNC will change likewise. A reduction in the scope of activities will result from a devaluation of the resources.

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Table 2: Summary of findings on charter loss

MNC Subsidiary Other divisions

MNC Internationalization

strategy Low density of network relations Competitiveness environment Phase of product life cycle Lack of strategic fit between _{HQ and subsidiary} High density of network _{relationships} Complexity of managing the

subsidiary Subsidiary characteristics, initial subsidiary role Weak resource position

2.2 Research gap

Concluded from the literature study, the characteristics of, and relations between the focal subsidiary, the HQ and other divisions within the MNC, are the principal issues in the process of charter loss. However, what the triggers of change are within these factors remain unclear. The contextual changes remain a black box. The purpose of this study is to clarify the field of charter loss, by focusing on the impact of contextual changes in the process of charter loss. It intends to shed light on the remaining dark spot of charter loss, by providing an answer to questions as; what changes in the environmental factors can eventually results in charter loss? And how do they impact the subsidiary? These are interesting questions that are left mostly untouched by previous scholars.

This thesis will contribute to the research on charter loss by performing a case study on a German HQ and its Polish subsidiary. This subsidiary is subject to a dramatically changing environment that has resulted in charter adjustments. The case study will provide in depth insights in the contextual dynamics and the impact of changes on the subsidiary. A resource-based approach will be taken, as it followed from the literature study, that a strong link can exist between subsidiary resources and charter loss. The impact of the contextual changes will be studied, as well as the alterations that these bring about in the subsidiary resources and the related resource dependencies between the HQ and the subsidiary. A charter adjustment to match the new conditions will be an expectable consequence. This leads to the following research question:

2.3 Research question

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3. CONCEPTUAL MODEL

In the studied research on charter demotion, the link between resource demolition and charter loss has been put forward. This relationship will be further investigated in this thesis. The purpose of this chapter is to provide an insight in what kind of subsidiary resources can be an important source of value for the MNC as a whole. After this, the factors that can cause a change in the distinctiveness of these resources will be discussed. The literature studied will arrive at a conceptual model that will serve as the basis for the case study. This will provide insights in the amount of impact that the contextual change factors can have on the subsidiary resource distinctiveness.

The following paragraph will start with a background description of the literature on the link between firm resources and performance. Of special value is the literature on the resource-based view. This stream of research provides insights in the essential resource characteristics that are needed in order to be a distinctive resource and to create a dependency situation between the HQ and the subsidiary.

3.1 Resource-based view

The factors contributing to firm performance have been subject to a great number of studies and have always been of enormous interest to academics. In early articles, scholars have studied the firm’s internal strengths and weaknesses opposed to its external threats and opportunities with an equal share of attention. Later, under the influence of Michael Porter, the emphasis shifted towards the external analysis of the firm. The resource-based view brought the attention back towards the internal issues of the firm, where resources form the basis for the final products and firm performance (Priem & Butler, 2001). A pioneer in this field has been Edith Penrose with her influential book that was published in 1959. Since then, the resource-based view has served as a starting point for numerous scholars, such as Wernerfelt (1984), Barney (1991), Amit & Schoemaker (1993) and Peteraf (1993). The basic idea of the stream of research is the direct link between firm resources, and a sustained competitive advantage and firm performance.

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refer to a firm’s capacity to deploy resources”. In this study, the focus will be on the firm’s resources. The resource-based view is mounted on the assumption that resources are heterogeneous and imperfectly mobile. Essential for resources and capabilities in order to be distinctive and produce value for the firm, is that they can be employed by the firm to improve the firm’s efficiency and effectiveness and thereby its performance (Barney, 1991).

3.2 Resource categories

The notion of resources is very broad and all-encompassing. A subdivision of the different kinds of resources may be helpful to arrive at a clearer insight in the different aspects that the notion beholds. One of the most basic divisions is between tangible and intangible resources. Tangible resources are those that can be found on a firm’s balance sheet (Galbreath & Galvin, 2008). These are what Barney (1991) refers to as the physical capital resources and are mainly specialized resources. They offer the firm fewer possibilities for diversification in new applications, but also tend to be rather scarce, inhibiting the competition from imitation. The firm’s plant and specialized technologies (Peteraf, 1993; Kogut & Zander, 1992), good local infrastructure (Kogut, 1991), access to cheap labor (Dunning, 1998) and geographical proximity (Rugman & Verbeke, 2001; Dunning, 1998) are among these.

Intangible resources are resources that generally have unlimited capacity and are not likely to be found on the balance sheet (Galbreath & Galvin, 2008). These are mainly generalizable resources that can be used for different purposes. This enables the firm to respond to a changing and uncertain environment with needed flexibility. Moreover, the multiple serviceability provides the firm with a wider set of opportunities for further growth and development. Resources belonging to this category are entrepreneurial resources (Birkinshaw, Hood & Young, 2005), managerial expertise (Penrose, 1955) and skilled labor and employee know-how (Hall, 1992).

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organizational processes (Henderson & Cockburn, 1994), ICT systems (Laframboise & Reyes, 2005), dynamic routines (Teece, Pisano & Shuen, 1997) and flexibility (Grö ler, 2007; Amit & Schoemaker, 1993). R&D processes and -know-how (Taggart, 1998; Dierickx & Cool, 1989) and marketing skills (Esteve-Pérez & Mañez-Castillejo, 2008) also belong to this category.

3.3 Resource distinctiveness

The preceding paragraphs already hinted at the importance of resource distinctiveness. Distinctive resources and capabilities will grant the firm with a sustained competitive advantage and firms with superior resources will outperform others when it comes to competition and generating profits. The resources that a firm possesses play an influential role in its performance (Mahoney & Pandian, 1992). Scholars of the resource-based view define four main characteristics as essential for a resource in order to be a source of a sustained competitive advantage. They claim that a resource should be valuable, rare, imperfectly imitable and non substitutable (Amit & Schoemaker, 1993; Peteraf, 1993; Barney, 1991; Wernerfelt, 1984). These four attributes will serve as a means to assess the resource distinctiveness.

In the preceding paragraphs on the resource-based view, there has merely been dealt with resources and capabilities on the firm-level. As both the MNC and the local context are part of the direct subsidiary environment, subsidiaries have to deal with an excessive level of complexity. Therefore, resource distinctiveness on the aggregation level of the subsidiary will deserve some scrutiny. What subsidiary resources are exactly and what kind of subsidiary resources can represent a value to the MNC, will be discussed next.

3.4 Resource-based view at the subsidiary-level

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the [subsidiary]”, while “capabilities refer to a [subsidiary’s] capacity to deploy resources”.

At the level of the subsidiary, a critical quality of the resources held by the subsidiary is that they can be leveraged to other parts within the MNC and can be globally exploited. The control of these resources should be curtailed to the subsidiary, making the HQ dependent on the subsidiary for its resources (Rugman & Verbeke, 2001).

This demonstrates that as a subsidiary is part of an MNC, on the aggregation level of the subsidiary, resource distinctiveness is strongly related to the distribution of dependencies between the HQ and the subsidiary. In the next paragraph, the dynamics of resource dependencies will be discussed more thoroughly. As well as the role resource distinctiveness plays in shaping the resource dependencies between the HQ and the subsidiary.

3.5 Resource dependency

An MNC is a complicated network of interrelated relationships, in which the subsidiary needs to compete with both internal and external actors for the favor of the HQ and to keep on standing. The subsidiary can enforce its strategic position in the network by creating dependencies of the HQ and of other MNC subsidiaries on its resources. Control of highly distinctive resources needed for activities that are of great strategic importance to the MNC, will lead to a greater HQ dependency on the subsidiary (Benito, Grøgaard & Narula, 2003). When the subsidiary simultaneously lowers its dependence on others for resources, it can strengthen its position within the MNC network (Provan, Beyer & Kruytbosch, 1980).

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Resource distinctiveness creates dependency situations between the HQ and the subsidiary. Notwithstanding, it is important to consider that following the resource-based view, the subsidiary’s resources are considered to be environmentally contingent and the advantages that can be derived from them are context specific (Brouthers, Brouthers & Werner, 2008), which means that resources can rapidly devaluate (Bouquet & Birkinshaw, 2008). This implies that if something changes in the subsidiary’s environment, the resource distinctiveness might alter accordingly. Because the importance of the resources is extremely context dependent, it is highly significant to clearly define and specify the context in which the resources are assessed and on what its value has been based (Kallinikos, 1984; p. 64). Therefore, the subsidiary’s context and the change factors that can affect the distinctiveness of the subsidiary’s resources will be discussed next.

3.6 Contextual change factors

In the previous paragraphs, the significance of contributing distinctive resources to the MNC was clarified. The extent in which the subsidiary contributes distinctive resources shapes the resource dependency between the HQ and the subsidiary. However, it is believed that organizations are environmentally contingent and that a tight link exists between the organization and its environment. A change in the environmental contingencies may also bring about an alteration in the distinctiveness of the resources. The changed circumstances might require other resources that better fit the new situation or esteem certain resource characteristics differently (Pfeffer & Salancik, 1978; p. 47; 286). If the distinctiveness of the resources diminishes, the HQ will consequentially become less dependent on the subsidiary. Charter demotion will follow. But what are the changes that can take place in a subsidiary’s context?

These questions cannot be answered completely without taking the complexity of the environment into account in which subsidiaries operate. Scholars that studied subsidiary role development (e.g. Geppert & Williams, 2006; Simões, 2005; Birkinshaw & Hood, 1998; White & Poynter, 1984) more or less agree that as subsidiaries are part of an MNC, their context is not only shaped by the local environment, but also by the MNC itself.

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local environment conditions also includes a change in the relative conditions of the host country compared to alternative locations. It is reasoned that the contextual changes will first affect the resource distinctiveness and consequentially influence the HQ-subsidiary resource dependency situation, before they ultimately result in charter loss.

The changes that affect a subsidiary’s resource distinctiveness will stem from the subsidiary’s context, that is, the local environment and the MNC. This paper will therefore structure the change factors correspondingly and will separately study the changes that come from within the MNC and the changes in the local environment. The case study in chapter 5 will examine what contextual changes affect a subsidiary’s resource distinctiveness and how this impacts the resource dependency situation between the HQ and the subsidiary. The main interest lies in the changes that result in charter removal.

3.7 Local environment factors

The local environment can have a considerable impact on the competence level of a subsidiary (Benito et al., 2003). In order to decrease the distinctiveness of a subsidiary’s resources, changes in the local environment should have an influence on at least one of the characteristics of resource distinctiveness, or affect more at the same time. Hence, the ways in which changes in the local environment of the subsidiary can affect the distinctiveness of the subsidiary’s resources are fourfold. They can alter the value or rareness of the resource, or create possibilities in order to imitate or substitute the resource available to the HQ.

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3.7.1 Host country changes

A host country can provide local advantages that are an important source of distinctiveness for a particular subsidiary resource. This resource distinctiveness may be derived from economical or political benefits that the host country offers to the MNC Davidson, 1980). Some benefits are inherited, such as the climate and the geographical location. Others are the result of path dependent and continuous developments over a longer period of time. The latter are also rather stable. But most host country conditions cannot be taken for granted, as they are subject to periodical changes. This is the case for host country factors that are contingent on economical and political conditions, such as wage levels, exchange rates, trade barriers, political stability and tax regimes (Fahy, 2002; Dunning, 1998; Davidson, 1980).

Economical changes in the host country can lead to higher costs of the factor inputs, thereby rendering the economical advantages related to the subsidiary location null and void. On the other hand, economical changes can also enhance the availability of skilled labor and more knowledge intensive assets, as they improve the level of development in the host country. Political changes can also have an influence on the distinctiveness of the subsidiary resources. When political barriers are being reduced, the HQ is not dependent anymore on the subsidiary for the location-related resources that were previously inaccessible (Jarillo & Martinez, 1990).

3.7.2 Changes in the competitiveness of the environment

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locations (Dunning, 1998). The widening scope of MNCs that resulted from the developments mainly entailed the opportunities for locating low skilled, low wage activities. This makes that the already established subsidiary locations, especially those that are beneficial for activities at the bottom end of the value-added scope, for example manufacturing, are being threatened by competitive pressures (Simões, 2005).

The global scope of MNCs is also enhanced by the reduction in spatial costs related to geographical distances, such as transportation and coordination costs. The difference in these costs between proximate and distant countries has decreased significantly over the last three decades, triggering MNCs to start operations in less proximate locations (Dunning, 1998).

All above described changes in the global economy have led to a more global and tougher competitive environment. The emergency of new market economies gave rise to a larger competitive field and the reduction of trade barriers made resources more widely available to the MNC. The distinctiveness of the resources and capabilities held by a subsidiary is relative to the availability of alternatives to the HQ. Due to the internationalization moves and the continuing globalization of businesses, boundaries become vaguer and the number and the quality of the alternatives available for the MNC gains ground. When the alternatives become more attractive, the subsidiary can be in danger of losing its resource significance within the MNC (Andersson, Forsgren & Holm, 2002).

3.8 MNC factors

Changes that stem from within the MNC are also a main influential factor in the development of the subsidiary resources. Shifts in the HQ strategy can play a particularly influential role in this process, especially changes in the HQ’s internationalization or sourcing policy (Simões, 2005). Another influential change entails product developments. Both will be described below.

3.8.1 Changes in the HQ strategy

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persuasion (Barney, 1991). The kind of resources that the HQ attaches most value to is dependent on the extent in which they contribute to the strategy.

Core activities contribute the greatest value to the MNC. The added-value of the resources is therefore dependent on the extent in which they contribute to the core activities of the MNC. As different activities require different types of resources, the type of resources that the HQ relies on, alters along with a move in its strategy (Pfeffer& Salancik, 1978).

A general trend in western MNCs is a strategy shift that moves the core activities away from the focus on production technology and the exploitation of natural resources, towards more knowledge-intensive activities such as R&D and marketing (Dunning, 1998). The HQ strategy towards the requirements on subsidiaries has shifted likewise. Before the 1970’s, most subsidiaries were established for resource- and market seeking reasons. Nowadays, intangible, knowledge-intensive assets have gained in importance (Bouquet & Birkinshaw, 2008).

Another trend that can be signaled in the global business environment is a shift away from vertical integration. MNCs are transforming from large vertically integrated networks, towards horizontally organized firms, in which manufacturing activities are mainly acted out by contractors in the developing world (Gereffi, 2001). MNCs developed the preference to keep the core activities in house, while outsourcing the rest of the activities to external contractors. This way, the company is able to optimally focus on its core activities.

3.8.2 Product developments

Shifts in MNC preferences can be motivated by the different stages of the product life cycle the company finds itself in. Each stage is associated with a different optimum of internationalization. New product developments have a great influence on the entire organization. The impact of the new products and the related MNC focus can be described on the hand of Vernon’s (1966) product life cycle.

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the need for production in close proximity to the main sales market down a little. The R&D activities that are required for the development of new products, call for knowledge-intensive resources that are still mainly found in the developed world. On the other hand, the faster communication and shorter lead- and transportation times that resulted from the technological innovations, made it no longer necessary that production takes place in close proximity to the main sales market. Production is more and more performed in the periphery of the main MNC market in the first stage of the product life cycle (Gereffi, 2001; Dunning, 1998).

The second stage becomes relevant when the product matures. Standardization makes striving for economies of scale justified. Furthermore, product demand will cross national borders, leading to exports from the home country. The company will continue to do so, as long as transportation and marginal production costs remain lower than initiating production in the importing country (Vernon, 1966).

In the maturing phase, the emphasis on the cost price of the product becomes greater. Companies start to look abroad for ways to save on the production costs. The main differences in production costs between any two locations will be a factor of labor costs. If the lower labor cost in a foreign country offset the transportation costs of the home country, importing the goods will be reasonable. In the maturing phase, the production still relies heavily on labor, as the process is not fully standardized. In this phase, the less developed countries offer a competitive advantage as a location for production (Vernon, 1966). After the 1970’s, innovations in production technology enabled a faster automation of the production process, although especially the apparel industry still heavily relies on the labor intensive manufacturing that mainly takes place in the developing world (Gereffi, 2001).

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The description of the last stage has been based on the internationalization moves that were common until the 1970’s. After that, the rapid industrialization of the developing world altered the circumstances. Firms in the developing countries became able to develop the capabilities that were required by the western MNCs for their production. This made them attractive contractors and MNCs did not longer give shape to their international production by means of vertical integration, as they were used to (Gereffi, 2001).

As follows from the description of the product life cycle, the focus of the MNC will shift with the entering of each new stage. Vernon’s descriptions of each stage of internationalization were based on the situation in the 1960’s. As a consequence, the later events in the world of international business activity are not embraced. Therefore, the theory has been updated with other literature that cover the developments after the issuance of Vernon’s article. Moreover, stages follow each other up in much higher speed that was common in the 1960´s.

Another downside to the use of Vernon’s product life cycle, is the focus on the resource- and market-seeking motivated internationalization. As was described in the previous paragraph, nowadays, internationalization is more often triggered by the search for knowledge-intensive assets. These are less likely found in the developing countries and the search for cost savings on labor-intensive production does not longer dominate anymore (Bouquet & Birkinshaw, 2008).

Despite the fact that Vernon’s product life cycle theory became outdated as a result of the rapid wave of globalization, it is still applicable in explaining shifts in MNC focus with each stage of the new product developments, as long as the later developments that took place after the issuance of the theory are also accounted with.

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4. METHODOLOGY

The literature study dealt with the resource characteristics that make the HQ dependent on a subsidiary. Moreover, the contextual changes that take place in the subsidiary environment were discussed. It follows that there can be link between a weakening resource distinctiveness and charter loss. Changes in the subsidiary context might trigger this process. This methodology section will start off with the conceptual model that was derived from the literature review. Then, a clarification of the key notations being used in this thesis will be given. After that, the methods for data collection will be explained.

4.1 Conceptual model

The literature study led to the following conceptual model that is graphically displayed in figure 2. The case study is needed to further elaborate this model, to concretize the contextual changes and to specify the subsidiary resources.

Figure 2: Conceptual model

4.2 Definitions

For the transparency and the validity of this thesis, the most important key notations will be defined. This way, it is clearer what is meant and what the terms encompass. Although German Total itself is a subsidiary of Unipro, German Total will still be defined as the headquarters, according to the level of aggregation being used for the

Distinctiveness of subsidiary resources Changes in resource dependency situation between HQ and subsidiary Charter demotion Change factors

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purpose of this paper. This is explained in further detail in the next paragraph. A subsidiary will be defined, following Birkinshaw and Hood (1998; p.774) as “a value-adding entity in a host country”. As the main value value-adding activity of the Polish subsidiary in the case studied is manufacturing, the division in Zielona can also be defined as a manufacturing subsidiary.

A subsidiary role is made concrete with the terms “charter” or “mandate”. A subsidiary mandate is defined by Birkinshaw (1996; p. 471) as “the business, or element of a business, in which the subsidiary participates and for which it has responsibilities beyond its national market.” This definition strongly overlaps with the way Galunic & Eisenhardt (1996, p. 256) define the term charter as “the business a division actively participates in and has responsibility for.” Following these two definitions, it can be concluded that the terms charter and mandate can be used interchangeably, but for the consistency of the paper, only the term charter will be used to indicate the responsibility of the subsidiary. As mentioned before, in a charter, the subsidiary’s product-, market and functional scope are laid down. The terms charter loss, charter demotion and charter removal are used interchangeably as well. Their significance entails the narrowing down of activities in the product-, market, or functional scope of the subsidiary.

The resource distinctiveness will be assessed by means of Barney’s (1991) VRIN-framework. From the literature study appeared that the process of charter demotion involves the interplay of the focal subsidiary, the HQ and competitors for the subsidiary charter. In the case studied, Chinese contractors are found to be the main competitor. Therefore the subsidiary resource distinctiveness will be measured in comparison to the HQ and the Chinese contractors. Resources are valuable when they enable a firm to exploit opportunities and/or neutralize threats and therewith contribute to an improvement of firm’s efficiency and effectiveness. Resources are rare when they are not widely available to the HQ or China. Furthermore, they should be imperfectly imitable and non-substitutable by the HQ or China, in order to be distinctive (Barney, 1991).

4.3 Aggregation level

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subsidiary within the MNC. This makes it best suitable to centralize the subsidiary and its context. The other main actors are the headquarters and Chinese contractors. These actors influence each other and themselves. They all play a role in determining the strategic role of the subsidiary within the organization.

German Total will be the headquarters in the level of aggregation studied. Unipro is considered to have little direct influence on the relevant actors at play, and is therefore left outside the direct scope of this study and will be treated within the periphery. This conclusion has been drawn on the basis of the information on decision making autonomy and involvement, retrieved from the interviews and the organization charts. When the influence of Unipro is opinioned to be important on a certain aspect, for this aspect, the role of Unipro will be treated in greater depth.

4.4 Data collection

Information will be derived from a single case study and from literature found in books and scientific articles. A literature study has been performed to collect background information on developments in the relationship between headquarter and its foreign subsidiary. The conceptual model that resulted from the literature study has been applied to a single case study on the headquarters of German Total and its Polish subsidiary. This case study is aimed at providing insights in the change factors that can impact the subsidiary resources in such a way that they can lead to charter demotion. By means of applying the case to the literature, the relevant factors and the impact of the contextual change factors can be studied and based on the findings, conclusions can be drawn.

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A big advantage is that the researcher was active at the German Total headquarters. This enabled a far more extensive and informal way of data collection, than would have been possible when the case was externally studied. This way, the researcher had more access to company data. Furthermore, because the researcher was participating in the company activities and had contact with employees at all divisions, it was able to form a broader picture and place the activities, developments and history into context in order to draw well founded conclusions and get to place the findings into perspective.

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5. CASE STUDY

The resources of a subsidiary determine the degree of HQ dependency. Their distinctiveness is to be seen as a relative value, contingent on the internal and external environment. When changes take place in the contextual environment, this will directly affect the distinctiveness of the resources. In the case of negative effects, the HQ may decide on a charter divestment of the affected subsidiary.

These issues derived from the literature study. It is hoped to clarify them in the following case study. It should bring a clearer insight in the change factors that are active within the subsidiary context and in the impact they have on the subsidiary’s resource distinctiveness. The initial subsidiary charter and the changes that have occurred within its charter over the years of existence will be described. Then, the resources held by the subsidiary will be defined and studied. Thereafter, the changes that have taken place within the contextual environment will be discussed, followed by an assessment of the impact that those changes elicited on the resource distinctiveness.

All case-specific information in this chapter and further has been derived from interviews, unless otherwise depicted.

5.1 Initial subsidiary charter

The German Total HQ established the focal subsidiary, German Total Polska, in 1994. The subsidiary would replace the manufacturing activities for the LEMON products that had previously been located at the HQ location in Buchen. The main motive behind the establishment of the subsidiary was economical and was triggered by the quest for lower costs of factor inputs. As the LEMON-production is highly labor intensive, the local wages accounted for the largest part of the production costs. Zielona in Poland was the elected subsidiary location, as this location offered geographic proximity to the main German Total sales market, while making labor available at far lower wage levels, thereby cutting its production costs while maintaining a certain amount of flexibility in responding to market demands. The high savings on the production costs due to the access to cheaper labor could offset the higher transportation and coordination costs that came with the move of the production away from the HQ location.

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law that certain hierarchical levels have to report to the headquarters. This involves the obligation that annual reports should be signed by the CEO in Buchen and that investment limits should be conform the Unipro requirements. These juridical obligations are complemented by a large amount of pre-conditions for Zielona that are set up by the German Total HQ in Buchen. These requirements mainly pertain to the current costs, for which the personnel costs account for the largest part, and the yearly budgets. These pre-conditions are a standard for the Polish management and determine their freedom of movement. Monthly, the Polish management should report to the HQ on their results, which are checked at being within limitations. The Polish management also needs to present monthly reports on the occupancy rate and performance, to make the efficiency of the employees traceable for the HQ (company report, August 9, 1996; interviews).

The charter that was given to the subsidiary was the complete LEMON production for German Total that fully covered its European sales market in the specialty trade channel, packaging and the logistics organization of the products to Berlin, from where the products are directly distributed to the customers dispersed over Europe. The purchasing department is also located at the subsidiary location. Purchasing negotiates and places orders, which thereafter need to be approved by the operations manager. The stocks remain on the balance sheet of the HQ, so the subsidiary carries no responsibilities for this. All foreseen changes affecting the stock need to be approved by the HQ. In terms of White & Poynter (1984), the initial subsidiary charter encompassed the full German Total product- and market scope and manufacturing, packaging, purchasing and supply chain planning as its value-added scope.

The initial subsidiary charter will be summarized in table 3 below.

Table 3: Summary of the initial subsidiary charter

Value-added-scope Market-scope Product-scope

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5.2 Charter developments

Since the subsidiary had been granted with its initial charter, it has experienced several charter developments. These will be described next. Each phase that was accompanied with a charter adjustment will be summarized in a table. The adjustments compared to the preceding phase are shown.

After the takeover of German Total by Unipro in 1997, German Total became part of the globally active multinational Unipro. Unipro owned a French factory that produced APPLE JUICE, German Total’s LEMON-related products for the specialty trade. In 2004, APPLE JUICE production was integrated in the Zielona subsidiary, enlarging its product- and market scope. This Zielona charter enhancement was at the cost of the French APPLE JUICE factory that was closed down by Unipro in 2004. The total APPLE JUICE production was moved to Zielona to achieve synergy advantages of the core competencies of the German Total production site.

The production of LEMON and APPLE JUICE are highly divergent. LEMON is highly labor intensive and involves unit production, whereas APPLE JUICE is capital intensive and as mainly liquids are involved, concerns continuous production. A large number of specialized employees were attracted and Unipro invested in a dedicated factory of high quality. Zielona also became in charge of the packaging, purchasing and supply chain planning for the specialty trade channel activities that were related to APPLE JUICE. In other words, the Zielona subsidiary now is chartered with the full product- and market scope for both LEMON and APPLE JUICE. Production, packaging, purchasing and supply chain planning formed the value-added scope for LEMON and APPLE JUICE.

Table 4: Charter developments phase 1

Unchanged Unchanged + APPLE JUICE

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production was moved to the German Total plant in Zielona in 2004. Tail-end production involves the products that require a shortest possible lead time within Europe, so the company can keep a certain level of flexibility and is able to quickly respond to market demands. The bulk production for FRUIT remains in two other Unipro factories in Indonesia and China.

By means of FRUIT, German Total got involved in a completely new distribution channel next to the specialty trade. This was the retail channel, for which the FRUIT products for the European market were being produced in Zielona. Zielona became responsible for the FRUIT European tail-end product- and market scope. The value-added activities involved the production, packaging, purchasing and supply chain planning.

Unchanged + Retail Europe (FRUIT) + Retail Europe (FRUIT) This expansion of production also made that Zielona got involved in inter-company trade from 2004 on. This means that Zielona is not only producing for its own HQ in Buchen, but also started to produce LEMON, APPLE JUICE and FRUIT for other Unipro divisions spread around the world. As a result, production output increased rapidly. Production expanded even further when the share of private label products massively increased as a proportion of the total production. These products take up a large amount of the Zielona production capacity, as they are produced in very large batches. They are also more labor intensive, as they have their own packaging. Nowadays, 15% of the base assortment exists of private label products.

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In 2005, Zielona saw sales potential in the Polish market. To exploit the advantages that could be made, a sales company for the local market has been set up. This adds sales to the value-added scope of the subsidiary’s charter, with Poland as its market scope and with a full product scope.

At the same time, a sales support team at the Zielona site was established. The motive was to take part of the responsibility away from the HQ in favor of Zielona. Their task is to coordinate the sales and they are the first point of contact for the sales managers in case they have a question or problem concerning the delivery of their products. When they cannot solve the problem, it will be passed on to the supply chain manager. Final responsibility remains with the HQ. When the subsidiary is not able to solve the problem, the HQ is involved. At the moment, the sales support team is still not able to work independently and most problems need to be dealt with in the HQ, instead of in the subsidiary as it should be.

+ Sales Poland Poland

+ Sales support Complete _{(LEMON + APPLE JUICE)} Complete _{(LEMON + APPLE JUICE)} Moreover, in its time of existence the subsidiary has developed a HUB-function, to assure the MNC of a certain amount of flexibility in their timely availability and delivery of the products. Furthermore, they are responsible for the effective coordination of the supply chain planning and purchasing.

In 2005, the MNC started to outsource part of its production to factories in China. This part mainly consists of the company innovations that are responsible for all company growth. As a result, Zielona lost its full product scope for production. As purchasing requires close coordination with production, this activity has also been moved to the outsourcing partners for the new products, at the cost of Zielona. Packaging of the outsourced products is still performed at Zielona, so the charter demotion only concerns the product scope for the production and purchasing activities.

Manufacturing Unchanged - New product developments

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Recently, German Total Polska lost its newly obtained sales charter to another Unipro division that was responsible for the Unipro House & Care sales in the retail channel. In order to achieve economies of scale, the HQ has decided to integrate the Zielona sales company in the Unipro division. As a result, this subsidiary charter was lost again.

Value-added-scope Market-scope Product-scope

- Sales - Poland - Poland

In German Total Polska yearly 35 million LEMON and 15 million APPLE JUICE and FRUIT products are manufactured and around 600 people are employed here. The MNC is dependent on the subsidiary in Zielona for the manufacturing and delivery of the products to the Berlin distribution center in the required quality. The main functions that are contemporarily located in Zielona are production and supply chain, purchasing and sales support.

The above described developments led to the final charter that is summarized in table 9.

Table 9: Final charter

Purchasing Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Classic LEMON & Complete APPLE JUICE & Europe FRUIT

Manufacturing Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Classic LEMON & Complete APPLE JUICE & Europe FRUIT

Packaging Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Supply chain planning Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Complete (LEMON & APPLE JUICE) _{& Europe (FRUIT)} Sales support Complete (LEMON & APPLE JUICE) Complete (LEMON & APPLE JUICE)

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5.3 Resources Zielona

The Zielona resources are defined and will each be individually described in the following paragraphs. They have been derived from interviews with the Buchen CEO, CFO and Zielona’s manager operations. To recall the literature research on the resource-based view, in order to be a resource an asset must contribute to an efficient and effective operation in order to achieve the highest performance (Barney, 1991).

The conceptual model that was derived from the literature study has been adjusted to the case specific information. Each part of the conceptual model will be separately depicted. The part that the section will focus on is highlighted. This section will discuss the subsidiary resources.

5.3.1 Workforce

The location of the subsidiary provided German Total with its most valuable resource; a workforce that worked at far lower salaries than the employees had cost the company in Buchen. Relatively low labor costs are found to be a key source for a comparative advantage (Moroney, 1975), thus making it qualify as a valuable resource. The access to localized resources the subsidiary provides to the MNC is unique, tied to the specific local conditions and path dependent. These characteristics make the resource an important source of competitive advantage (Benito, 2005). The higher the share of labor costs in the total production costs, the higher the comparative advantage to be gained.

Change factors

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The cheap Zielona workforce pays the greatest contribution to the labor intensive production of LEMON. By automating production, the workforce can be substituted by machinery. This can only lead to the same cost advantages when the capital investments offset the labor costs. The labor costs in Zielona provided German Total with a greater cost advantage than an automatized production process would, hence making the resource non substitutable.

The workforce that was accessible in Zielona was not only cheaper than in Germany, but they were also highly dedicated, improving the work productivity. After the fall of the Berlin Wall the working conditions had greatly improved and due to the high unemployment rates, the Polish were glad that they had a job and were very willing to work in the factory.

5.3.2 Quality

German Total attaches great value to the maintenance of its brand name and image. Therefore it is important that the final products meet the end user’s expectations. The German Total products are sold in the specialty trade channel at A-brand prices. The higher prices also raise the expectations and the product quality therefore is very important in meeting the consumer’s anticipation (Wedel & Leeflang, 1998).

The focus on quality is deeply rooted in the German Total strategy and this also comes back in the great importance that German Total attaches to quality requirements in the production process. The company makes use of a quality management system that sets the highly demanding quality requirements for production. Regular checks ensure that these are met. The outcome is that Zielona is able to constantly deliver the essential product quality and therewith contributes to the MNC performance (German Total company website).

This direct alignment of quality and control is not available to the HQ at other suppliers and contractors, which makes the resource rare. An advantage over substitutes, such as outsourcing, is that the process is better controllable. In the case of outsourcing production, the contractor uses local suppliers for all materials that go into the product. These are very hard to control by the MNC. Strict oversight on both the contractor as on all the subcontractors is needed in this case, which is very time consuming.

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European laws. This facilitates the ability of the Polish subsidiary to deliver the required quality. The fact that the level of development in the country plays a role in the annotation of quality, constrains the scope of the HQ for suppliers that are equally able to meet the quality requirements. Developing countries will likely follow a different perception of quality and quality specifications are harder to align.

The relevance of quality as a valuable resource has been confirmed by Mehra & Agrawal (2003), who state that a well functioning quality management system is an important source for competitive advantages.

5.3.3 Plant and equipment

In order to properly describe the next resource, a distinction should be made between the resources needed for the unit production of LEMON and for the continuous production of APPLE JUICE. The LEMON production is labor intensive and is easily transferred, while the equipment for the APPLE JUICE production is modern, capital intensive and dedicated.

The initial subsidiary plant and equipment were exclusively suited for the production of LEMON. The only assets needed for the LEMON production are a number of sewing- and punching machines. These are not dedicated and are therefore easily acquired elsewhere or transferred to an alternative production location.

The advantages of owning a plant and equipment are highly valued by the HQ, especially the ability to directly influence the production planning and to control the processes. Vertical integration of manufacturing provides the MNC with the needed control to achieve the flexibility for quick responses (Richardson, 1996). Knowledge is kept internal and there is a focus on the continuous enhancement of technological possibilities. The knowledge accumulations are contingent on internal organizational systems and relationships, and are therefore path dependent, which makes the resource hard to imitate (Kogut & Zander, 1992).

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are not subject to the transaction costs that deal with buying from contractors (Kogut & Zander, 1992).

A large warehouse from where the logistics and distribution are organized is directly connected to the production by means of an order processing system. This facilitates the integration between the production and the distribution. Order picking is also organized here. This close integration between production and logistics improves the efficiency of the operations and positively affects the performance of German Total. Therefore, the LEMON plant and equipment can be considered a distinctive resource.

5.3.4 Flexibility

The subsidiary can schedule their production around the interests of just one major stakeholder, German Total. All production that takes place at the Zielona production site is for German Total or inter-company trade. This enables the HQ to obtain a great extent of flexibility in the German Total Polska output by directly influencing production decisions and planning. They can decide on what is to be produced and when. A central value of Zielona is the aim to shorten the production cycle and to be able to quickly respond to customer demands.

Moreover, all products are packed in Zielona in the country specific packaging. This is done here to be more flexible in responding to shifts in demands. If one country cluster has higher demands than expected, while they are lower for another one, the packaging can be adjusted likewise. From Zielona, the products are transported to Berlin, from where they are directly distributed to the stores all over Europe.

The central position of the subsidiary, close to the German Total main sales market, is a big pro regarding the flexibility and the lead times of production and keeps the coordination costs lower. This is a big advantage opposed to more distant production sites from where the lead time increases due to longer transportation times. The central location of the subsidiary resulted in the fact that German Total Polska became a HUB-function for Europe. All products that are produced outside Zielona need to be delivered to the Zielona site, where the products are re-packed and the logistics to the customers is arranged.