MBA Global Business Management
Business nowadays cannot be separated to the concept of globalization. No mater what the nature of the business is, as it grows, internationalization is its next natural step of development. The fact mentioned is realized by almost every businessman or women as they considered the risks and benefits of internationalization. This paper will elaborate the nature of internationalization and its consideration of benefits and challenges regarding Small and Medium sized Enterprises (SME). This paper will elaborate various aspects of SME relating to its internationalization process trough the discussion of the following case study.
II Case study –the main body-
II.1. Case Background
The company in discussion is a provider of CAD Software Packages with 3 executives as board members, which are:
Ø a 65 year-old owner, Paul Trautmann;
Ø a new Sales Manager, Paul Thompson;
Ø an Operating Manager; Peter Thompson.
Originally, CAD is a combination of software and hardware that enables operators to design anything from simple designs like furnitures and sophisticated designs like airplanes. We understand that the Computer Aided Design package as refer to by the case study consists of the software, a high quality graphic monitor, a mouse, light pen or digitalizing tablet for drawing and a special printer or plotter for printing design specifications (‘CAD’, 2004).
The new sales manager has apparently heard about the benefits of internationalization as he has been playing with the idea for a year. To date however, he is thinking seriously about the possibility of international expansion to the German market and invited us, expert consultants on international management to jumpstart the process. Besides trying to incorporate the right considerations into his expansion plan, other reason of inviting professional management consultants might be to ensure the owner of the company, Paul Trautmann to undertake the project as soon as possible. The owner is currently being skeptical about expansion plans.
This paper will present a study of SME internationalization in order to convince Mr. Trautmann and provide Mr. Paul Thompson with the necessary knowledge to start building his expansion plan.
II.2 Global Business Management
There are various justifications of corporate internationalism which under the circumstances, can be used to reason with any skeptical mind. However, there are also challenges and significant considerations needed to be clearly elaborated to avoid short term euphoria. Trough the literature review stated below, we can asses the benefits & reasons why internationalism is very popular; while important considerations and challenges will be elaborated in later chapters.
II.2.1 Literature Review
II.2.1.1 Current Researches Relating SME Internationalization
To understand the choice of making international investment for the SMEs, previously we must be familiar with the present condition of SME internationalization. Below are several statistical data conclusions relating to the internationalization of SMEs:
1 Small and Medium Sized firms account for 10 % of FDI
2 SMEs responsible for 25% – 35% of internationally traded goods
3 Experienced revealed that in smaller countries, SME’s tend to internationalize earlier
4 SMEs in countries with less regulation tend to be more international
5 International SMEs tend to be larger than domestic SMEs
6 International SMEs are getting smaller
(“A World”, 2003)
II.2.1.2 Positive Aspects of Global Business Management
Why internationalism is so well and vast developed? Ruigrok stated a few positive aspect of competing in global market business activities:
1 Fayerweather stated that international resource transfer and firm integration among international affiliates could produce competitive advantages that are not available for domestic firms.
2 He also believes that MNC will learn trough its global activities and the exploitation of its global resources which would finally results company development.
3 In contribution of the theory, Kogut mentioned that a global network structure holds a very significant influence in MNC’s success of failure. Flexibility, arbitrage and leverage opportunities could come from a well established structure of global network.
II.2.1.3 Reasons and Benefits of Internationalizations
During the 1990, a new trend has of globalization has emerged. Companies considered the decision of embarking into the global world to be a very rational decision regarding to:
1 The increasing integration of productive process. Effective and efficient outsourcing, licensing, subcontracting and other cooperative efforts based on international division of labor has been considered necessary and even common among business society.
2 The decreasing restrictions and barriers of international flow. Government interventions and the presence of Stated Owned Enterprises (SOE) have been diminished, allowing the global market to take their place as international tool of business integrations.
3 The rapidly growing technological advancements reduces cost and the complexity of going global, which created more interesting opportunities of export and other international trade entry modes.
Rasmussen also contributed a few factors accelerated the process of internationalization. The factors are:
1. Novel market condition; the market are being more and more specialized resulting firms to gain smaller fractions of the market than the previous decades., this would in turn encourage expansions and innovations
2. The vast development in technological aspect of production, transportation and communication,
3. The increasing capabilities of the work force, for example, employees are a lot more mobility and knowledge about foreign cultures and markets
The positive factors causing internationalization to be very popular has been sufficiently elaborated. The discussion above should at least present an interesting topic for further considerations. If we are positive that Mr. Trautmann is beginning to understand the massive amount of opportunity cost not to undergo the internationalization process, then we can start elaborating the process of internationalization for Mr. Paul Thompson.
II.3 Preparing for Internationalization
The benefits mentioned above are all achievable if we are prepared to overcome the challenges of corporate internationalization. However, research also stated that SME internationalization, which involves complex combinations of exporting, FDI, licensing & alliances, are often done by only little planning (“A World”, 2003). Below are significant considerations needed to be incorporated in Paul Thompson’s internationalization plan.
II.3.1. Important Considerations
Regarding its position as ‘the second level’ of business measured by size, SME faced more challenges in internationalization efforts. Moving beyond national borders involves taking bigger risks and making increasingly larger proportion of investment.
Prior to internationalization efforts, there are a few specific issues and concerns regarding the internationalization effort of SME needed to be paid attention to:
Competitive advantage and varying forces
Most SME worried about the possibility of transferring their competitive advantage to foreign market. They argued that competitive advantage depended upon hard to imitate factors, such as, the conditional support of surrounding environments and the condition of competitors. With relatively smaller budget for research it is harder for SME to make sufficient research of their future competitors in the foreign countries. But the positive fact of this issue is that smaller scale of business gives SME the benefit of flexibility and speed of response (David, 2004).
Productivity and Competitiveness
Studies indicated that it is very unlikely for an SME to benefit from economics of scale in an internationalization process. But the fact implies that internationalized SMEs are still more profitable than those which are not internationalized. The competitiveness of SME’s in foreign market is largely depended upon its flexibility and speed of response (David, 2004).
Information and Intuition
Regarding to the knowledge of foreign market, large MNEs are facing the same obstacle as SME’s. The obstacles are the lack of viable information sources. Larger MNE’s could easily conduct their market research to outperform SME’s, but the validity of their researches in foreign land is usually questioned, due to the differences of culture and rules of the game. Both are to some extent depending on their instinct in the new ground (David, 2004).
An SME embarking on international business might need to put the arguments mentioned above into consideration. It is better if they take advantage of their advantages and be cautious of their challenges being an SME. They need to ask themselves the following questions:
1. Have the company prepared methods of achieving competitive advantages in the totally new market?
2. Have the company provided sufficient funds for rainy days?
3. Have the company possess the necessary flexibility to survive the competition?
4. Have the company acquire sufficient and reliable source of information on the new market?
II.3.2 Safe Steps of Internationalization
There are companies who excelled in internationalization at their first attempt. These companies are known as global start-ups, high technology start- ups, born global, etc. But relating to various experiences, researches found a similar pattern of the internationalization steps applied by most SME. To inexperienced companies like Mr. Trautmann’s, these steps are worthy guidance material. Under the Uppsala internationalization model, the steps are:
1. An SME previously have no experience in international trade, usually started with entry modes that need less substantial commitments, for example, by direct exporting to a foreign country
2. If the initial step has proven to produce stable benefits over a period of time, then the next step is exporting with the help of independent representatives. This step is also known as indirect exporting
3. The next step is to develop sales subsidiaries in foreign countries. This step is the first risk taking investment the company has to make due to the differences of financial (tax) and cultural considerations.
4. If the subsidiaries are proven to be successful them there is no reason why the company shouldn’t continue to the forth and final step, which is establishing a production facility abroad.
The prior step would provide inputs for establishing the next; for example, relationship with agents, distributors and other sales representatives could produce information about potential buyers and market conditions. Observers could describe companies’ internationalization directions by observing their current conditions (Forsman, 2000).
This study has revealed the reasons and importance of internationalization. We have also displayed the core considerations of SME internationalization efforts. Overall, the literature review described that SME internationalism has been a common discussion material due to the additional considerations of the difference between SMEs and large MNEs.
The core advantage of being an SME inside a global market is to have a flexible state of business. SME can give a relatively quicker response toward sudden environment changes compared to large MNEs. But SME must also consider the weaker state of financial support which tolerates only little mistakes in planning the internationalization process. In the end, we must put in mind that despite efforts to increased or competitive advantage in preparation of internationalization, uncontrollable external factors would sometimes pose as a significant obstacle. The study of the factors elaborated above would give a new SME a proper view to start planning for its internationalization endeavors.
Relating to the specific case of Mr. Trautmann’s company of CAD Software provider, we have prepared an elaboration of potential problems in practice, suggestions regarding the process’s functional considerations and also an example of a relatively similar case.
The company in discussion is trying to enter the computer industry in Germany. In general, the German market for CAD packages is vastly growing but also highly competitive. Together with Electronic Data Interchange systems (EDI), the German market for CAD packages has been growing averagely 15% to 20% per year (Combs, 2005). The market is also crowded with large and old software companies like the Megatech and Graphisoft.
In this present condition, competitive advantage is no longer considered as an extra merit. For a CAD software companies, competitive advantages must be obtained and maintained in order to survive the intense competition. There are some functional considerations relating to Mr. Trautmann’s company expansion plan.
IV.1 Functional Issues
IV.1.1 Cultural Problems
It is common knowledge that global expansion always accompanied by cultural problems. Relating to the case study, as mentioned before, the demand for competitive advantage is high due to intense competition. Along with efforts of gaining competitive advantage, companies usually applied high tech information technology in order to increase managerial and operational efficiency. The complexity resulted by high information processing demands become increasingly difficult due to cultural problems (Ruigrok, 2003).
Researchers have engaged in the study of these cultural problems arise in cross-cultural cooperation. They concluded the problems to be divided in three core issues, communication, coordination and motivation. Due to these three issues, the efforts of maintaining stability in Multinational Corporation have become very costly. Later studies include corporate governance and transactions cost relating to cross-cultural problems as the implicit cost of internationalization (Ruigrok, 2003).
IV.1.2. Financial Problems
Entering a foreign market, the most disturbing of the financial risks are the exchange rate fluctuations and inflations. Multinational Corporations rely on management’s strategic planning in controlling their overseas affiliates. A significant part of the strategic planning is the financial calculation regarding their affiliates. Using these financial considerations, management can predict the profitability rate of overseas affiliates. These considerations have a very significant meaning in order to perform anticipation actions if calculations predict future loss. But if the affiliates’ country posses a relatively active exchanges fluctuation, the prediction ability of management will practically be eliminated, leaving management with uncertainties regarding their overseas assets (Ruigrok, 2003).
However, the problem usually overcame by intensive experience of companies in the foreign market. As managers become more sensitive to local economic and political aspects, they develop a sense of prediction toward financial changes. Relating to this fact, international companies usually look for local partners to guide them in efforts of overcoming the specific financial uncertainty problem.
II.1.3. Marketing Problems
“Marketing management is the process of planning and actuating ideas, determining price, promoting, delivery of goods and services to create a trade which will fulfill individual and organizational goals”
(Kotler, 2000, p 9)
Relating to marketing managerial, we suggested that the company incorporated the following considerations:
1. Which counties to enter
2. How to enter the countries
3. How to adjust product’s features relating to each country
4. How to set prices for different countries in a small region to avoid pricing issues
5. How to adjust communication styles to meet local cultural habits for each different country
(Kotler, 2003, p 8)
The decisions above must be made to in accordance to the different practice of laws and regulations, different negotiating styles, different requirements in purchasing, owning and selling, fluctuation of currency, different corruption conditions, different political tendencies and the like (Kotler, 2003 p 8).
IV.2. Key Problems and Suggestions
Despite the functional problems mentioned above, there are several barriers of SME internationalization. It is important to be aware as these problems could be undetected in the planning phase, but occur in practice. The barriers can be divided into external and internal barriers.
The external barriers include lack of International networks and distribution channels, increased level of competition, lack of government support and effective SME strategies, liability of newness or foreigness, lack of market information and other necessary information, payment delays and cash flow considerations, institutional bureaucracy, other external environmental factors such as trade barriers, unfavorable exchange rates, etc (Pollard, 2004).
While the internal barriers includes opportunity cost and disruption to domestic and market activities, lack of capacity, lack of management knowledge/experience/motivation, risk adversity, lack of financial resources, lack of exporting knowledge, lack of experienced staff, inability to utilize information resources effectively (Pollard, 2004).
Some of the problems mentioned above are external in nature and thus our company could only try to adapt to the changes. However, there are efforts that can be done internally to overcome other existing problems. The strategies needed to be developed are:
Build and obtain managerial skills. For many enterprises, embarking on global market implies a change in management strategy. Evidences also describe that successful SME internationalization incorporate some level of management style changes
Good planning. Generally, companies wait for years in order to set solid strategic plan and achievable goal for sale revenue and profits. Successful global SME are the ones able to control the entire process of internationalization activities
Finding appropriate foreign strategic liaisons/partners. A good partner who know the domestic environment, legislative and non legislative barrier, language, local customers’ requirements and market orientation would encourages the company to learn about markets and the activities/preparations required to enter a foreign market
Technical capability and knowledge. Experts believe that the true key of successful undertaking of internationalization comes from the capability of technical advantage resulted by advanced scientific knowledge
Quick adoption and response. Successful SME usually have the capability of correctly identifies market opportunities and quickly organize itself in order to present a quick response to that opportunity. Technical capabilities would mean little without the ability to predict market directions.
IV.3. Examples of Corporate Internationalism
Last but not less important, we present a practical example of a company in the similar industry which also entered the same speaking market. Due to the limited extent of the paper we will only present a brief elaboration of one of the challenges the company had faced and the solution the company had applied for the specific problem.
IV.3.1. UK Computer Company: BOCC
The Big Oxford Computer Company (BOCC) Ltd (www.bocc.co.uk) is an example of a UK-based SME that intends to expand into a German-speaking country, Swiss.
The company, as the named implies is located in the university city of Oxford. The BOCC’s core competence is to develop and host IT systems using web technologies. In addition, the company also provides software and systems development services to clients in the governmental, charitable, commercial and not-for-profit sectors.
The company says that its strength lies upon the ability to produce innovative solutions for clients within tight timescales at a competitive price. Under such circumstances, the company’s project consultants will take time to comprehend the customers needs so that it will delievr the best solutions. In general, there are four main products or services of BOCC. They are application development, server hosting, technical services, and consultancy.
IV.3.2. The Challenge: Entering Swiss Computer Industry
Multinational Firm theory believe that competitive advantage does not come from exploitation of external opportunities, but come from internal qualities of the company. It means that to ensure smooth entrance into Swiss computer industry, BOCC should carefully design the expansion plan while improving internal business process. This is important since entering a non-English speaking country will provide BOCC with high degree of challenge, especially concerning the interpersonal communications or cultural matter.
It is common knowledge that global expansion always accompanied by cultural problems. Increasing degrees of internationalization also creates rising complexity which eventually will exhaust managerial capacity.
For this reason, BOCC that has a strong customer focus with continously improving interpersonal communication with clients should equip their employees with capability of speaking non-English language, especially German that becomes the official language in Swiss. This capability is important to help BOCC employees in understanding what the Swiss customers’ needs sicne not all people or customers in the Swiss understand Enlish so that BOCC’s employees had better to understand them in tehir language.
This is inline with BOCC’s objective that realizes the importance of real communication and regular face to face meetings with clients in order to ensure that the solutions BOCC provides match the customers’ needs.
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