160 CHANGE IN SME INTERNATIONALISATION: AN IRISH PERSPECTIVE
Niina Nummela , International Business Turku School of Economics & Business Administration
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Sharon Loane* School of International Business University of Ulster, Magee Campus
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Jim Bell School of International Business University of Ulster, Magee Campus
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Submitted to the 6th McGill International Entrepreneurship Conference, Londonderry, 19-22 September 2003 * Corresponding author
Introduction The number of small firms operating on international markets has been growing, and simultaneously the process of internationalisation has been accelerating. During the last decade, small and medium-sized enterprises1 (SMEs) have been the object of increasing interest. Politicians, governmental bodies and academics have re-evaluated the significance of this group of firms, and currently regard them as significant sources of wealth and employment. On the other hand, due to improved communication systems and the deregulation of tariff barriers, “the world is getting smaller”. Consequently, SMEs are pushed towards and pulled away from international markets. The number of small firms operating internationally has been growing, slowly but steadily.
On the company level, internationalisation seems to be a growth process that is tightly intertwined with the company’s other activities (cf. Jones, 1999). Moreover, internationalisation on the individual level has become a crucial factor, particularly because experience and learning are considered key features. However, it remains unclear how the key business operations change during internationalisation, and what kind of resources and skills – on both the organisational and the individual level – are needed to manage the internationalisation process successfully. The objective of this study is to replicate Nummela’s, work (2002) which shed some light on this topical issue by describing and analysing change in internationalising Finnish SMEs. This study will examine the change process among a sample of three internationalising Irish SMEs.
The emphasis of earlier research on organisational change has been on the incremental, cumulative change process, which has been used to explain almost everything (Gersick, 1991). The dominant approach – the configuration school – assumes that organisations evolve mainly through periods of stability, which are interrupted by occasional discontinuities (Miller &
1
This paper uses the European Union definition: SMEs employ less than 250 persons, their annual sales do not exceed 20 Mill. ECU and they are independent (i.e., other companies’ share of ownership does not exceed 25 per cent). The terms SME, small firm and small business are used interchangeably throughout the paper.
Friesen, 1984). These revolutionary changes are usually driven by external events, such as changes in technology, in the competitive situation or in the political conditions (Tushman & O’Reilly,1996), but they may also be a result of internal factors (Gersick, 1991). Organisational changes range from slight adaptations to dramatic shifts in organisational structure, strategy and culture (Schuh, 2001). The theoretical explanation of this development – the punctuated equilibrium paradigm – is based on the assumption that incremental change during the stable periods develops through adjustments to the existing system, with the activity patterns remaining the same, whereas during revolutionary periods the deep underlying structures in the system also change (Gersick, 1991). The original study (Nummela, 2002) was an exception to the earlier mentioned mainstream research as the focus concentrated on the content of change, i.e., what actually changed in company during internationalisation. Thus, change is defined here as the difference in form, quality or state in an organisation over a selected time period (cf. Van de Ven & Poole, 1995, 512). This change is studied on the level of one company function, internationalisation, when the company extends its activities from domestic to foreign markets (cf. Havnes, 1998). Although changes may be studied on many organisational levels, including those of the individual, group and the organisation (Van de Ven & Poole, 1995), in small firms the emphasis should be on the owner-manager, who is often at the core of the change processes. Correspondingly, and following Hohenthal (2001), the interest of this study is in understanding the individual action and the manager’s perception of change.
Traditionally, organisational change has been studied within frameworks reflecting incremental, first-order change (Havnes, 1998; Chapman, 2002). However, as it seems that the cliché about the increasing pace of change in the globalising business environment is true (Tushman & O’Reilly, 1996), it could also be assumed that the changes related to internationalisation are increasing in number and importance, as well as becoming faster. As a result of this development international business calls for managements and organisations that are able to cope with both incremental and
discontinuous change (cf. Tushman & O’Reilly, 1996). Consequently, from the managerial perspective, understanding changes due to internationalisation is also crucial.
Change in SME internationalisation It has been argued that change in company internationalisation has not been a major area of interest in international business research (Schuh, 2001). This is surprising as internationalisation is generally understood as an evolutionary process during which a company adapts to the international environment (e.g., Calof & Beamish, 1995). The aspect of progressive change in this process has been emphasised by several researchers. The importance of the strategic perspective has also been underlined: expansion to international markets requires changes in the company strategy in order for it to fit into the novel environment (Schuh, 2001; Lam & White, 1999; McDougall & Oviatt, 1996). Strategic fit is particularly important for rapidly internationalising companies, which need internationally fit strategies, policies and procedures from inception (McDougall et al, 1994).
The models for describing and analysing small-business internationalisation are dominated by the incremental-change paradigm (Lam & White, 1999; Havnes, 1998). These stage models are tempting due to their simplicity and logic. However, they have been strongly criticised (e.g., Clark et al., 1997; Madsen and Servais, 1997; Petersen and Pedersen, 1997; Andersen, 1993). The majority of internationalisation models have followed the life-cycle-process theory (for a discussion on process theories, see Van de Ven, 1992). Affected by certain stimuli, a firm will proceed from one stage to another, and all firms will follow a similar pattern. These models are quite deterministic, and are based on an objectivist interpretation of reality and human nature: internationalisation is seen as a response to a stimulus, either internal or external to the firm. Only a few recent studies have applied a more teleological interpretation of the process, in which a company may take multiple routes in order to achieve the desired end state (e.g., Andersen et al., 1997; Madsen and Servais, 1997). To sum up, literature on small-firm internationalisation concentrates on describing an evolutionary process of slow-moving change.
From the perspective of this study it is significant that earlier research neglects the problems companies face during this corporate change process (Lam & White, 1999). Nummela’s study (2002) attempted to fill this gap by focusing on the changes that were due to internationalisation. This study by replicating Nummela’s work in the Irish context aims to build upon and take her original work forward. According to the original framework, it is assumed here that on the company level the change related to internationalisation is reflected both internally and externally (see Figure 1 below). Export strategy Operation mode Product
Market external
nge Cha Business idea
internal Finance
Personnel Organisational structure
Figure 1. Framework for studying change in the internationalising small firm (Source: Nummela, 2002)
External changes are those that can be seen from the outside, such as changes in export strategy (products, markets, operations), whereas internal changes are related to the organisational structure, finance and personnel (cf. dimensions of internationalisation by Welch and Luostarinen, 1988). The upper part of Figure 1 describes the change in the company’s export strategy as internationalisation proceeds. In the course of time, a small firm has to decide whether to adapt the strategy and its key elements: which products/services it will offer, how and to which markets. These decisions are naturally affected by environmental factors, and they may vary
according to the market2. On the other hand, researchers have been less interested in the internal changes due to internationalisation that are illustrated in the lower part of Figure 1. A small firm may have to reassess the company’s financial arrangements, reconsider its organisational structure or diversify its personnel in order to acquire the skills and resources needed for internationalisation.
The limited interest in the financing of small-business internationalisation is surprising. It is generally assumed that the financial management of small firms is different from that in large firms (LeCornu et al., 1996). Therefore, it could also be assumed that this difference is more pronounced in the context of internationalisation where the contradiction between growth and limited resources is stressed. Indeed, significant proportions of the export problems experienced by small firms are finance-related (Bell, 1995).
Internationalisation impacts the performance of the firm, and changes can be measured in terms of turnover and/or profit development, as well as by the export ratio. However, it may take considerable time before exports create positive cash flows, and internationalisation usually requires substantial upfront financial investments. Growth can be financed by reallocating cash flow from other activities, but also otherwise, e.g., by debt or equity arrangements. In general, small firms find the funding of internationalisation problematic. Either the choice of alternatives is restricted or the manager’s preferences for the available alternatives may be biased. It could be argued that, because some small firms do not fully meet the qualifications, the funding available is partly deficient and thus there will always be a gap between supply and demand. (Hamilton & Fox, 1998). On the other hand, it may be a question of pecking order, i.e., the manager prefers some forms of funding to others. For some small firms the pecking order may be truncated if
2
The debate on whether to standardise or adapt the product on foreign markets started as early as in the late 1960s (Buzzell, 1968), and since that time it has been a standard topic in international-marketing textbooks. Diverse operational modes are also well covered in the literature, although the change aspect has often been neglected (for recent discussion on the change of operation mode, see for example, Pedersen et al., 2002; Petersen & Welch, 2002; Petersen et al, 2000; Calof & Beamish, 1995). Additionally, internationalisation inherently includes a change of market, so from the viewpoint of this study, the interest lies in the extent of that change, measured according to the number and geographic location of the target markets, for example.
managers are unwilling to consider some forms of funding, either because of restricted conditions of supply or personal preferences (Howorth, 2001).
Financial preferences usually lean towards internally generated funds. Failing this, external debt is preferred, external equity being the last option. (Howorth, 2001; Hamilton & Fox, 1998; Barton & Matthews, 1989) Aversion to external finance mainly arises due to: the cost of the funding, the loss of independence and of control (Howorth, 2001; LeCornu et al., 1996; Barton & Matthews, 1989). Desire for independent and autonomous action is one of the key characteristics of entrepreneurship, and in small firms autonomy is often linked with the rights of ownership (Lumpkin & Dess, 1996). Loss of independence seems to be a decisive factor in funding as well. But in reality there may be many combinations of funding streams utilised by internationalising companies, and the availability of funding may well impact the pathways taken to international markets.
Internal changes are tightly intertwined, and finance changes may have effects on the organisational structure (e.g. minority ownership) and vice versa. Arguably, as a company internationalises, administrative and organisational demands increase and the company responds to this by making organisational rearrangements (Welch & Luostarinen, 1988). From the perspective of change and internationalisation, there are two key questions: the first concerns what export-related activities are carried out inside the firm and which ones are left for selected partners, and the second how the internal activities are organised.
An increasing number of partnerships and alliances have been considered one of the distinctive characteristics of globalisation, providing ways for companies to match their capabilities to the changing environment (Sachwald, 1998). The shortened time span in business operations requires even more effective and concise utilisation of the network, particularly for foreign markets entry. This, in turn, leads to variety in governance structures. Parker (1996) suggests that, because of globalisation, organisations use more hybrid forms instead of traditional governance structures.
Miles and Snow (1986, 63) argued back in the 1980s that the rising new organisational forms were both causes and effects of the changing nature of the new environment. According to them, strategies and structures are based on managers’ attempts to match companies’ capabilities to the environment.
It is possible to achieve this matching by developing the company’s external relationships either vertically or horizontally. Vertical co-operation is based on the idea that the management redefines the boundaries of the firm by making contracts with other organisations. Therefore some activities are considered core competences3 and kept inside the company boundaries, whereas others may be assigned to reliable partners in order to improve the efficiency of the firm. Horizontal co-operation, on the other hand, refers to partnerships and alliances with other companies on the same level of the value chain. In this case, co-operation is based on a common goal, which the partners aim to achieve through joint activities. Internationalisation may require both types of co-operation in order to be as competitive as possible. Competitive advantage may be obtained, for example, through the creation of a well-functioning supplier network, or through alliances with other firms – small or large – to acquire the resources needed on international markets.
Change is also manifest in company internal arrangements. Existing organisational structure may be sufficient for the domestic market or even for managing an international dealer network, but sometimes more fundamental structural changes are required to ensure control and presence on the target market (Lam & White, 1999). An additional motive for organisational change may be the desire to demonstrate commitment to an international market(s) (Welch & Luostarinen, 1988). Such internal change, for example, setting up a foreign sales office, in turn may drive other changes at various levels: these may include change in the financing requirements and in the type of personnel required.
3
A core competence is a competitively unique bundle of skills and technologies that contributes substantially to customer value and forms the basis for entry into new markets (Hamel & Prahalad, 1994).
As Welch and Luostarinen (1988) commented, internationalisation depends heavily on the people initiating and carrying out the related activities. Therefore it may be assumed that it has an effect on company personnel. Earlier research assumes that this is based on experiential knowledge, which personnel collect from foreign operations (e.g. Johanson & Vahlne, 1990). The manager as a decision maker is in a key role as a voluntary, individual actor in the process. Experiential learning by key decision makers and other personnel will occur as they recognise the opportunities and problems, seek solutions to these problems and then put the solutions into practice. However, in addition to learning about external elements, such as foreign markets and institutions, this also includes learning about the internal resources of a firm, and its capabilities in new and unfamiliar conditions (Eriksson et al., 1997). Theories of individual learning also take into account the personal experience and knowledge that is stored in the firm from its birth. This also means that when people move from one company to another, they carry the experience with them, which also partly explains the accelerating internationalisation of SMEs and the “leapfrogging” of stages in the process.
From the perspective of the company, it is a question of maintaining and developing the collective memory. Internationalisation may require changes in this, and it could be argued that long-term success in international business depends on the company’s ability to change and develop (Hohenthal, 2001). Such change and development may be supported by the acquisition of supplementary knowledge and experience, in terms of training existing employees, buying expertise from professionals or recruiting new people. Therefore, it is proposed here that the personnel of a small firm will encounter some changes due to internationalisation. These changes arise from the development of the collective memory of the company.
To sum up, on the company level, this study describes change due to internationalisation according to the framework illustrated in Figure 1. Change can be classified into various types. Watzlawick et al (1974) distinguished between first- and second-order changes in organisations distinguishing between incremental and fundamental changes in organisations. These changes
can be further divided to alpha, beta (first order changes) and gamma (second-order) change (Golembiewski et al., 1976). Both these classifications are applied in this study as changes in each of the dimensions are classified accordingly.
Changes in a company do not occur in a vacuum, but are strongly intertwined with the core of the business. A firm’s international operations are based on its business idea and it may be argued that a reciprocal relationship exists between change due to internationalisation and the business idea of the company. All changes have to be in line with the business idea, and it may be that some changes occur because the business idea has been reassessed. On the other hand, the business idea is sometimes modified because of internationalisation. A change in the company’s business idea could be described as a revolutionary change, which alters it’s deep structures. This kind of change could be classified as a second-order change, which would lead to different ways of operating. These kinds of fundamental changes are bound to have an effect on the company’s internationalisation as well. Table 1: Internal change
Finance Alpha
Internationalisation funded through internal funding
Beta
Internationalisation, partly/fully funded with external debt
Gamma
Internationalisation funded through external equity
INTERNAL CHANGES Organisational Structure Move towards short-term cooperation (Horizontal and/or vertical) Creation of long-term alliances
Permanent internal change: creation of subsidiaries or joint ventures abroad.
Personnel Incremental learning by existing personnel (complemented by occasional bought in expertise Training existing personnel in new skills/ knowledge and/or more permanent relationships with external service providers Recruiting new personnel for international activities, importing experience into the company
RESEARCH DESIGN This study closely follows the original research design (Nummela, 2002) in order to ensure consistently and ultimately comparability of results. Change as a study object requires special attention to be given to the research design because of the retrospective and longitudinal perspective needed. Particularly, when the focus is on change processes, longitudinal research is
recommended as it permits the identification and observation of processes (Kimberly, 1976). As stated earlier, the number of empirical studies on change and internationalisation is limited, and only a very few of them have taken a longitudinal research approach. The reasons for the lack of longitudinal studies are obvious: they require a lot of work and take a considerable time compared with traditional research designs. However, although laborious, they do offer the possibility to obtain very rich descriptions of the internationalisation of the companies concerned. For this reason, this study also takes a retrospective perspective, although the research design is not necessarily longitudinal, as the data was collected at only one point of time from three Northern Irish case companies that are in different stages in their internationalisation.
One of the key questions to be solved in the research design was the question of timing (see Mitchell & James 2001). In order to make this evaluation frame as stable as possible, the first export delivery was selected as the starting point in the analysis. When this starting point is fixed for all of the companies, the findings from each one may be compared in cross-case analysis. The time period in question is the time from the first export delivery to the time of the data collection.
Respondents were asked to look back and describe the changes during the time period in question. In analyses of change, the key interests are the triggers: deadlines, milestones and crisis situations (Gersick, 1991), which could also be called critical events or incidents (e.g. Halinen et al., 1999). Tracking critical incidents enables the researcher to observe mechanisms and processes through which changes are created (Schuh, 2001). However, the definition of a critical event is subjective, as the actors themselves determine which events are critical and which are not (Halinen et al., 1999). This study concerns the critical events related to internationalisation.
The founding CEOs were interviewed face-to-face and were closely involved in the company’s change over time. The interviews were semi-structured and followed a loose pattern based on the theoretical framework. Data triangulation was used to complement these interviews, and other,
particularly secondary, data was collected. Memos, annual reports, brochures, Internet pages and other material, as well as newspaper articles, were used as additional sources of information.
In order as to get as broad an overview of the phenomenon as possible, no industry or other background limitations were imposed. This variety increased the richness of the data and the diversity of the cross-case analysis as the time period in focus varied. Some details of the case companies are summarised in Table 2 below, a more detailed description of each company follows in the next section. Table 2: Summary of the case firms’ selected characteristics Turnover in 2002 Personnel in 2002 Exports (%) in 2002 Founded 1st Exported Internationalisation type
Company A Not disclosed (but > £1million) 52 100% 1994 1994 Born Global
Company B £1million
Company C £1.2million
23 25% 1997 1999 Born Global
18 75% 1983 1993 Born Again Global
Internationalisation and Change in Company A Company A was founded by two academics from a university in Northern Ireland. There was very much a paradigm of spinning out start-ups at this particular university, and both founders had been involved in various spin-out activities. They started trading in 1994 on the back of 14 years of university research into advanced DSP architectures. From the outset the academics involved recognised that they were going to set up a company resembling those of Silicon Valley. Company A currently employs 52 workers and is headquartered in Belfast, with sales and marketing offices in San Jose, California. This company is privately held and were reluctant to disclose their annual sales revenues, as they felt that this was sensitive information, but did indicate that it was in the order of units of millions.
They design and license intellectual property (IP) for microchips, rather than making chips. They are now focused on video and image processing IP, and less on communications as in the past. Their high performance, low power application-specific hardware accelerator cores have already
been licensed to big semiconductor companies as well as OEMs. The company’s business idea has undergone considerable change with time. At inception in 1994 in order to fund the R&D for the portfolio of Intellectual Property they undertook commissioned design services. The consequent sales revenues were relatively low but 1996 they had achieved profits in the region of £100,000 based on pure services only. These profits were banked against future expansion plans. Post 1996 they moved into a second phase where a few people were still providing the commissioned IP services to keep cash flowing, but others now began to build the foreground IP, the actual robust product which would eventually go into millions of chips. As the foreground IP generated revenues, the commissioned design services were dropped. In 2001 they homed in on broadband, wireless and multimedia applications, and many of the hardware solutions acquired aspects of programmability. By 2003, the product range had extended to offer applicationspecific accelerator cores for system-level integrated circuit design, including; Broadband wireless, Speech and voice, Digital video, Data security and Signal processing. They recognised right from inception that they would always have a global market place, indeed the export ration has always been 100%. The original design services were exported (1994-96) to Korea and the US. However, direct exporting of the “product” began in 1996 to the US. In the same year they expanded to Japan as there was a strong telecommunications industry and a blossoming video technology market based there. However, in this market they pursued an indirect strategy which was instrumental in opening up the huge market potential there. Expansion to Korea followed in 1997, and Israel in 1998, Company A currently export to around 30 different countries. They maintain the corporate headquarters in Belfast with sales and marketing headquartered in California, and a network of sales representatives/agents in South Korea, Israel, the US, the UK mainland and Japan. There have been many radical changes since its birth in 1994, and the management predict that because of the fast moving pace of their industry there will be many more. They have utilised various strategies to fund international activities during the different operational phases. In the early days they received small scale external funding from the Local
Enterprise Development Unit (LEDU) in Northern Ireland and from the university. In addition they received a considerable sum for research and development from the Industrial Research & Technology Unit (IRTU), which enabled them to take on board their first employee. From 1994 to 1996 the company funded its product development by selling commissioned IP design services internationally (Korea and the US). After initial product launch in 1996 a small number of people still followed this model to ensure cash flow. However, in 1999 they went after venture capital funding. This was triggered by a request from a large client to licence IP. At that stage they were the only small silicon company with a virtual product that actually worked well in the chips. They were encouraged us to go out and get equity funding and to expand quickly. They had second round funding in 2001, totalling $10 million. This particular investment was used to accelerate the expansion of the company's worldwide network of sales, marketing and support offices and build upon its design engineering capabilities. As part the financing round, they appointed two new non-executive directors; who brought impressive market knowledge, managerial insight and unparalleled experience of the successful implementation of IP based business models in the semiconductor industry. Most recently in early 2003, Company A underwent a third US$5M funding round and new investment from Invest Northern Ireland. This round also prompted senior management change with four new board members, two of which were from the venture capital firms and two with extensive industry and management knowledge. In this case change in the financing of the firm is tightly intertwined with, and is a driver for personnel changes. There have also been considerable internal organisational and structural changes in Company A to date. Company A’s team has expanded from the original two founders on 1994, to 52 people. Because of the expanded product offerings these engineers are working in teams dedicated to each product offering. The skills mix has changed as they grew, for example, the engineering team now has 30 members. In addition although Company A is still relatively small specialist departments have emerged. In contrast to early days when the CEO undertook all of these functions, they now have in place, sales and marketing, finance, R&D, and a human resources department. The board has also been strengthened with the inclusion of new non-executive directors and new board members after the second and third venture capital rounds as highlighted
above. The export business to the US drove the opening and staffing of the US office. In fact Company A invest considerable resources to training and developing their people, and they attribute this investment as having been key in pulling the company away from a very technically oriented university spin-out to an absolutely market and customer focused company. In fact there has been a complete internal culture change. External relationships have also changed considerably since those early days. Company A has in place a number of close relationships. It is a partner in nine marketing partnerships with global organisations and also has numerous affiliations. The partner/strategic alliances are redefining the boundaries of Company A via vertical co-operation, improving their efficiency whilst maintaining core IP internally. Concurrently they also utilise horizontal co-operative means with external sales agents/representatives in a number of locations. This combination of horizontal and vertical co-operation increases their level of competitiveness on world markets. Company A have undergone many changes both internally and in its external linkages as a result of its international activities, and the senior management state that their flexibility and nimbleness in the face of change is in fact a source of sustained competitive advantage for the firm.
Internationalisation and Change in Company B Company B is a world-class developer and marketer of intelligent innovative medical technology, employing 23 employees. It was first formed in 1987, as a research and development initiative involving a university and a Belfast hospital. But in essence Company B remained as two people working on a research project spun-out from these institutions. In 1996 the Deep Venous Thrombosis DVT device was redesigned and re-branded as the Venometer. However, they only became a company in the commercial sense, when they moved away from the hospital under a new management and sales team, to commercial premises in 1997.
In 1997 they employed four people, including a dedicated sales person to target the UK market. Revenue streams were small and difficult to grow, and the company was bought over by a local
technology business angel in 1998. This buyout gave them a new strategic direction and purpose, with one of the significant changes being that they could no longer be a “one-product wonder”. Alongside the core business of producing and marketing innovative medical devices, they now specialise in acquiring the licences of research projects at prominent universities, developing these for the medical marketplace.
Sales revenues were slow until 1999: in fact they lost money that year. However, since they doubled sales achieving startling growth in recent years. Currently their sales revenues are £1.2 million (2002). The lead market for medical device technology is undoubtedly the US. Under the private health care model, procedures are covered by insurance, ensuring payment. This structure makes it relatively easy to obtain the funding required by hospitals to purchase devices. In 2000 the US had the market potential of over 45,000 operating theatres and market potential worth $2billion. In anticipation of sales to the US the Venometer underwent the Food and Drug Agency (FDA) approval process, alongside the market research, finally launching there in 1999. Company B bought in help for this process in the shape of a graduate from the Explorers Programme (LEDU). This allowed them to cost effectively place someone in Boston for eight months to conduct the market research and examine the FDA process. In the three years from 1997 to 2000, they had established a comprehensive distribution network for the Venomter throughout the US, achieved a growth rate in excess of 100% and captured a 25% market share for this product, which the Design Council recognised with a Millennium Product Award. In the same year they received the “First Time Exporter Award” from Trade International and were voted the best SME in the Belfast Telegraph Northern Ireland Business Awards the following year.
The approach to the US entry mode was to form strategic alliances with partners rather than distribution agreements. The US partners are invariably the experts on the market and company B do not have to maintain a full time staff in the market. However they still avail of all the benefits of their partner’s knowledge and receive efficient feedback and information. Company B choose
vertical co-operation as a means to lever their resources to serve the US medical marketplace. The numbers of such agreements have increased in recent years, and now in excess of four are in place. In addition the same approach has been used successfully for the European and the UK mainland markets. One of the vertical partners Smith & Nephew for example, are carrying out initial research in Japan and Israel, with a view to a future launch there. In addition, Company B out-sources all the manufacturing under licence abroad and part of the development process in a further vertical co-operative agreement arrangement. Directly related to this business model are the high costs associated with a globetrotting workforce and the need for on-site training visits with the manufacturers, distributors and physicians for each product developed. Company B realised that the Internet had the potential to achieve economies by reducing the number of faceto-face meetings without compromising the quality of its pre and post sales support.
Company B originally had one flagship product, however, the buyout changed this as they then rapidly diversified the product range. They went to secure the worldwide rights for the next major product, the Fathom Monitor, a device, which measures the level of patient awareness under general anaesthetic. They turned the Fathom Monitor from a concept into a fully working production model in just nine months, taking it to market in 2000. Company B estimated that the market for this product was in the region of £1.3 to £2.3 billion annually. This was the first step to deliberately broadening the product portfolio, and to achieving a “conveyor belt system” where they always had new products coming through. Because company B take on board concepts, they have to “load the funnel” with enough concepts, so that enough products come through at the right time, as many are lost either due to technical or market evaluation. They focus strongly on the product development process and are currently working with a Northern Ireland university on a bone cement process.
They have had two rounds of venture capital to date. The first in 1998 raised £600,000 in exchange for 42% of the shares, although the current CEO is still the majority shareholder. At this stage they employed eight people and had annual sales of £239,000. This venture capital
essentially funded the internationalisation effort for the US market. As development cycles are long they went for a second round in 2001 (£2.6 million). These additional resources would have allowed Company B to hire extra software specialists and to fund clinical trials in North America, and build reputation in that market. However, they had gone through the entire process with a US based venture capital firm, and were at the signing stage when September 11th happened. The venture capital firm withdrew and this was coupled with a 20% drop in sales from the US. Company B commented that they got through by focusing on the UK market and consolidating costs. A spin-off benefit was the emergence of a more efficient product development process. They stated that they really develop on a shoestring. Interestingly, if the venture capital had gone ahead, the CEO planned to bring on board, a Chief Financial Officer, two non-executive directors and new Chief Executive with experience of the floatation process. In 2001, they were looking to eventual flotation, however, currently they are funding expansion organically, which slowed the original plans laid down in 2001. In addition to equity finance, they have had some small scale funding from LEDU and InvestNI (LEDU’s successor).
Company B have also changed organisational structure internally. They have obviously grown in numbers to 23 employees in 2002. Specialist departments have emerged; finance, R&D, administration and human resources. One of the major difficulties faced by this firm has been the ambition of the staff employed. The team is young and fiercely committed, but they had to add older and more experienced managers to the human capital already in the company. Although this experience has been “bought in”, there is little management hierarchy.
This culture took time to establish and brings valuable benefits. Company B is very flexible and respond extremely quickly to product development. One product was redeveloped in fifteen weeks, whereas a multinational had estimated it would take two years. However, the downside of changing the original spin-out to what it is today has been difficult. For example, one of the experienced managers who came on board, forced employees to focus more on planning, and this was highly disruptive, and it took time before this ethos became embedded. Company B focus on
their people and currently approximately 10% of sales revenues is spent on staff development. For example, some employees have gone to Harvard for the Leaders for Tomorrow programme, and many employees have been placed for extended stays with the vertical partners in North America. This investment has increased staff performance but is a drain on resources, as around 15% of employees can be away on “training” at any one time.
As highlighted earlier company B’s external relationships have also changed with time. They have set in place a number of vertical co-operative agreements, which have increased their competitiveness in the North American market, which alone generates 25% of sales revenues. In short Company B have undergone radical and ongoing changes at many levels since their beginnings in 1987, in order to arrive at their present position. They now view further internationalisation into European markets as both desirable and imperative.
Internationalisation and Change in Company C Company C was founded by the present CEO and a former colleague from the engineering sector in 1983. The firm provided electronics consultancy sub-contracting services mainly in the domestic arena for ten years. It has been mainly the vision of the CEO, which has brought company C through constant transition to its present position as a manufacturer of a complete inhouse range of telecommunications test products. The company now has joint headquarters in Belfast and in San Francisco, and is represented in over 40 countries by a network of over 50 distributors. In 2002 Company B, which is privately owned, employed 18 employees and had sales revenues of £1.2 million. The export ratio stood at 75% of total sales revenues, with the most important export markets being France, Germany, Italy, US and Taiwan.
The critical incident which formed the new product which took the company into international activities for the first time came about partly by accident. Due to the recession from 1990-1992 a lot of subcontracting work dried up. However, they had a large contract with a company in London, Company C did the design and client funded it, but there were technical problems and
the client pulled out. So essentially there was no work, and essentially no company at that stage. They evaluated the options, and decided to develop a product with export appeal, and came up with the idea for the first product which enabled the testing, development and demonstration of ISDN equipment.
These technologies are used around the world enabling customers to complete new product development, testing and quality control with attendant increases in efficiency and cost. In the first ten years (whilst non-exporting, and still a consulting firm) sales growth was extremely slow, however in the first year of selling the new product revenues doubled, and 35%-40% growth has been achieved year on year since then. At the time of development these products were very innovative and extremely niche in nature and the first few were sold in the UK. Foreign visitors to the UK sites which had the product installed contacted Company C. Unsolicited orders followed from the US, Germany and Italy. These early influential customers proved the concept and lent the company credibility. In 1999 a US sales office was opened to service the blossoming sales there and they entered the Taiwanese and Japanese markets in 1995. This time the sales approach was more structured and a nascent distributor network was set in place, and through experiential learning Company C were becoming more focused as to how the selected distributors and developed relationships with them. A specialised R&D team was set in place, which facilitated the launch of a second suite of products. Time to market has been critical for their success and they have invested heavily to keep ahead of current developments. Their ongoing R&D efforts constantly examine and develop new and innovative test solutions for telecommunications providers. At the same time the products have been adapted to appeal to a wide range of other customer bases.
In 1993, when the new form of Company C started they had no cash reserves and were facing closure. However, from their change in business idea they have essentially grown organically from sales revenues. At no stage have they taken any venture capital backing. Indeed, in 2002 when they faced a liquidity crisis as a result of the down turn post Sept 11th, the CEO re-
mortgaged his house as a means to obtain finance. In order to finance entry to new export markets they have availed of external non-equity sources of funding from banks and from agencies such as LEDU. InvestNI, provided the company with £0.25 million grant aid in return for a minority shareholding, and the CEO commented that there probably would have been no company today without their assistance.
The company has undergone vast internal organisational and structural change since 1983. For the first ten years they were a small electronics sub-contracting company working domestically. However after 1992, they changed form dramatically to become the export led industry leader, which they are today. The company has become more structured with time, and specialist departments have been formed, human resources, finance, marketing, R&D and so on. However, these have all been scaled back post the Sept 11th downturn in the US market. Both founders are both still active in the operational management of the company and have helped build the company and the sister Company C Inc, in San Francisco. This US based company gives an local appearance to the US customer base. Externally, company C has worked alongside the design labs of major telecoms multinationals to create an innovative family of ISDN testers and solutions, creating valuable vertical co-operative agreements along the way. In addition they have numerous horizontal co-operative agreements in place with a network of distributors on five continents. Company C have changed significantly in their twenty years of operations, the vast majority of these changes however, were driven by their international focus post 1992.
Cross-case analysis The three case companies have clear similarities and differences. Firstly, they are all experienced exporters and are committed to growth internationally. In fact two of the case companies, (A & B) may be considered as Born Global (Rennie, 1993), and the third (C) as a Born-Again Global (Bell et al, 2001), see Table 2. Although company B has the lowest export ratio (25%) and is less
dependant on exports than the other two companies, they are attitudinally committed, and see further international activity as the only growth strategy available to them. A cross-case comparison of the time elapsed from first export market entry per case is presented below.
Business idea The case companies in this study have all exhibited varying degrees of radical or second order change in their business idea. Although companies A and B had global vision from inception, A began by providing IP design services to fund product development. After the product was brought to the marketplace, there was a second order change. This occurred when they changed their strategy to become leaders in the semiconductor field as opposed to playing “catch-up”.
Company B underwent the first second order change when they became commercially focused as a result of leaving the hospital premises. Later they were bought over by the local business angel, and subsequently became more strategically focused, undergoing substantial second order change at this stage, both with regard to organisation and products. Company C in contrast underwent one second-order change in business idea. This occurred as a result of the critical incident (near closure) which propelled them into a new form and international markets.
Internal change The internal changes due to internationalisation in all case companies were significant, and second order in nature. All underwent beta level changes as they took external non-equity funding to establish their activities. These beta level changes were followed by gamma level changes in all three cases, where each of the companies funded expansion via a form of equity finance. Two pitched for and received venture capital. The third received InvestNI funding of £0.25million in return for equity in the company. These significant changes were interspersed with periods of alpha level change, as is their current position, when the companies were funding international operations organically from their sales revenues.
Changes in the business ideas with the attendant subsequent strategic changes also drove both beta and gamma level personnel changes. In all three companies specialist functional departments emerged over time, for example, finance and human resources. Because of their small size no company placed a specific export department within the structure, and personnel were not dedicated to export accounts as such. This may well be due to the fact that in the three case companies, growth and international expansion were in fact directly aligned, and one (A) had no domestic market. Rather the companies organised their people in specialist self managing “product” teams. The companies whilst each undertaking extensive training and development activities, which promote beta level change, did so to varying degrees. Companies A & B in particular invested heavily in this area. The skills mix of the employees changed as they grew internationally and as the service/product mix changed. Internal culture in all three cases changed over time from a predominantly technically oriented stance (and/or spin-out) to fully commercially focused organisations. Company A has extended these activities across their boundaries to include network partners from Japan, by training representatives for substantial periods of time in Belfast. In addition, the opening of the US joint headquarters was a gamma level change induced by the need to appear local in the target market, a spin-off benefit being that they were now well placed for venture capital funding on both sides of the Atlantic. In fact, the sales and marketing competencies previously embedded in the Belfast office have now been transferred to the US. Company B, have also underwent gamma change as they imported internationally experienced managers into the company. In addition they spend on average 10% of sales revenue driving beta level change, in order to upgrade skills and knowledge internally, so as to be better equipped for both domestic and international sales. Company C also place emphasis on their people and the knowledge/skills sets held by these people. They drive beta level change among employees, not only by training, but also through the technology transfer process, gained by engaging in ongoing R&D with co-operative partners. This “new learning” is then imported back into the company’s collective knowledge base and memory. They also undertake team-building activities regularly as a means to build esprit de corps, and ultimately
retain valuable human capital. They have also opened and staffed a US based subsidiary in order to appear local in that target market.
Change at one level often leads to change elsewhere, as changes can be inextricably linked. Company A strengthened their board on more than one occasion, whilst this was quite deliberate, it was also a requisite of receiving venture capital funds. This process bought in networks, experience and knowledge catapulting the company forward in terms of collective memory. This process demonstrates the interlinked nature of change due to internationalisation.
External change All three companies have forged external linkages and co-operations. Some of the external changes have been driven by the nature of the target market. For example, the US is a major focus for Companies A and C, both have extended the external boundaries of the company by setting and maintaining US based operations. This increases their level of competitive advantage as they appear local in that market. Company B’s major export focus is also the US, they have in placed a number of strategic alliances and partnerships; these helped build reputation in the market. By utilising such horizontal co-operative agreements, they do not have to maintain staff in the US, but have increased their level of control and knowledge via such co-operative means. In addition they have a vertical co-operative agreement in place, as they contract all manufacturing to a contract manufacturer, and have integrated their supply chain so as the US clients actually check FDA documents through Company B’s website, but the information is pulled from the manufacturers management information systems.
These case companies are leveraging their combinations of vertical and horizontal co-operative agreements which augment their resource base, providing sustained competitive advantage. Companies A and C are also using multiple foreign market entry strategies simultaneously. By utilising horizontal co-operative agreements, such sales and distribution agreements with local partners, in markets where business practices differ, for example, Japan, they are adding the
knowledge vested in those partners to the collective memories of the companies on an ongoing basis for relatively little cost. Again this strategy means that they have the advantage of appearing local without the costs that a subsidiary would incur.
External factors such as industry level changes and environmental shifts have also shaped change in the products of the case companies. The activities of competitors combined with the desire to be world-class players, has lead to constant product innovation. However, as highlighted earlier, changes are intertwined and bound together, for example, semiconductor industry level changes forced a change in Company A’s strategy and business ideas, which then drove change throughout the company at many levels, finance, organisational structure and personnel. Table 3. A summary of the changes in the case companies Company A Business idea External change
Company B
Several 2nd order changes Several 1st & 2nd order changes
Several 2nd order changes 1st & 2nd order changes
Company C
One 2nd order change
1st & 2nd order changes Gamma change then cont alpha changes
Product
2 Gamma changes with alpha in between
Cont alpha with one gamma
Operation mode
Gamma change then cont alpha
Gamma change then cont alpha
Gamma change then cont alpha
Market
Alpha change
Alpha change
2nd order changes
2nd order changes Beta change then gamma then alpha
Alpha change with one beta 2nd order changes
Internal change
Finance
Beta change then gamma change followed by alpha
Beta change then gamma change followed by alpha
Personnel
Gamma and beta
Gamma and beta
Several gamma and beta
Organisation
Gamma
Gamma &Beta
Gamma
DISCUSSION AND CONCLUSIONS Findings from the case companies support the argument that small firms take diverse routes to internationalisation and the level of change due to internationalisation also varies considerably. The cases showed that the framework used in this study is a well-functioning tool for analysing such changes, as not only the internal and external changes, but also the role of the business idea that was highlighted in the companies.
It would appear that change in SME internationalisation is more multidimensional than assumed. Various types of change could be identified and the phenomenon itself was analysed on diverse levels. The complexity of the concept is also demonstrated through the fact that the changes in the different dimensions are not necessarily connected, but they are very context dependent. This sets substantial managerial challenges as it complicates the identification of weak signals from the environment and thus the prediction of future changes. This multidimensionality also presents considerable requirements for research, as operationalisation has to be carefully managed. An explicit definition is essential if reliable and comparable results are to be obtained.
There was clear evidence from the case companies that the different types of change are linked and intertwined with each other. For example, venture capital funding driving personnel changes, which in turn drove further internationalisation activities. Indeed, the case companies illustrate that a “domino effect” with regard to change in SME internationalisation may be at work
Theoretically, it is interesting that the cases indicate different levels of change, but also various triggers and sources of change. It was rather surprising that the case companies’ commitment to internationalisation was not always connected with the changes. An example is provided by Company C, who would have continued in their domestic mode, except for a critical incident – the downturn in demand for engineering consulting services. This company was faced with a real dilemma: either change radically to survive, or to decline and die. At this stage internationalisation per se was not the key motivator, rather the continuance of some form of the company entity, but the founders recognised the potential for a niche product in international markets. Indeed often, the changes in these case companies were driven by industry level and environmental factors. A connection between the strategy and particularly strategic decision making and change could be observed, i.e., strategic decisions seem to lead to more visible changes. This links to the internationalisation process of the firm: traditional, incremental
internationalisation may often proceed without any radical turning points, resulting in mainly first-order changes.
It has been argued that Born Global companies should have been created to fit the prevailing international business environment from inception (McDougall et al 1994). In other words, it could be assumed that there would be fewer changes due to internationalisation in these companies. However, the findings from this study do not seem to corroborate this statement. Rather the Born Globals in this study, who were internationally focused from inception, underwent significant change in both business idea/strategy and structure. It would appear that global vision was the over-arching driver for internationalisation, but that the actual trajectory taken was formed by the availability of internal and external resources at different points in time, and how well the companies could lever these. Industry changes and shifts also played a part in forming the actual trajectory or pathway taken.
However, this exploratory study has some limitations as the findings are based on only three cases and the results can only be considered tentative. Nevertheless, they open new avenues for further research and point out topics that need more elaboration. It would be worthwhile, for example, to study sources of radical change in detail. When do they actually occur and why? Additionally, as little is known with regard to change in Born Global and Born Again Global companies, further study is required. Additionally, the study could be extended to companies whose internationalisation has proceeded from exporting to more demanding operation modes. McDougall and Oviatt (1996) have argued that operation modes that require more resource commitment also call for more strategic changes, and it would no doubt be rewarding to examine if this is really so.
A second limitation of the study is related to the identification of change. A retrospective research design is always challenging as it puts weight on the time perspective and on the memory of the respondents. Additionally, for the respondents it is sometimes problematic to recognise change
because from their perspective it may be considered as a part of normal business development. However, a more significant issue is the fact that it is sometimes difficult to separate change related to internationalisation from other change happening in the company. Indeed this may be particularly pertinent for the Born Global companies. Although the relationship between change and internationalisation was emphasised during the interviews, there is the possibility that the managers were describing change on the company level, and thus the changes related to internationalisation were given more weight than they should have been.
This study is an attempt to respond to increasing criticism of the existing theory of internationalisation offering a novel perspective to SME internationalisation, and to build on Nummela’s (2002) Finnish-based study. Based on the findings SMEs might be able to anticipate future changes in the environment and to adapt to them. This will also be reflected in their strategic planning. Additionally, the information can be utilised in organising public support for internationalising SMEs, particularly from the viewpoint of the support systems. Additionally, the findings of the original Finnish study (Nummela, 2002) and this Irish study could be of use to entrepreneurs who intend to expand their international markets, as understanding of the issues surrounding change would be extremely useful when constructing internationalisation strategies.
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