technical consultancy in internationalisation

International Marketing Review TECHNICAL CONSULTANCY IN INTERNATIONALISATION D. Deo Sharma Jan Johanson

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To cite this document: D. Deo Sharma Jan Johanson, (1987),"TECHNICAL CONSULTANCY IN INTERNATIONALISATION", International Marketing Review, Vol. 4 Iss 4 pp. 20 - 29 Permanent link to this document: http://dx.doi.org/10.1108/eb008339 Downloaded on: 25 September 2014, At: 11:50 (PT) References: this document contains references to 0 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 488 times since 2006*

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TECHNICAL CONSULTANCY IN INTERNATIONALISATION D. Deo Sharma and Jan Johanson, Department of Business Administration, University of Uppsala, Uppsala, Sweden


Previous studies of the internationalisation process of firms have focused on the internationalisation of manufacturing firms. This article analyses the internationalisation of technical consultansy firms, a service industry. On the basis of two Swedish case studies the article concludes that the firms' networks of relationships with other firms has a critical role in the marketingisation of the firms. Three steps in a strategy development procedure are outlined. Research on the internationalisation process of firms has come a long way in the past years. Models have been developed and tested (Johanson & Wiedersheim-Paul 1975; Johanson & Vahlne 1977; Bilkey 1978; Cavusgil 1980; Cavusgil & Nevin 1981). The main thrust of the previous research on the subject has been on the internationalisation of manufacturing firms. Firms in the service sector play an increasingly important role in the present day economy of industrial countries and a number of service firms have gone international in the previous years; the trend might be accelerated in the coming years. Although the literature about service marketing is growing (Gummesson 1978; Grönroos 1979; Lovelock 1984), little attention has been given to internationalisation of firms from service industries. In this article the focus is on the internationalisation process of Swedish firms in one specific service industry, namely the technical consultancy (TC) branch. But the aim of the study is to widen the perspective on the internationalisation process of the firm. The article starts with a brief background presentation of the Swedish TC business. Acknowledgement We express our gratitude to the Jan Wallander Foundation for Social Science Research, Svenska Handelsbanken, Sweden for providing us with a research grant to carry out the project. Winter 1987

Then a model of the internationalisation process of the firms is briefly described and discussed in the light of some specific characteristics of TC firms. In the third section follows a case description of the internationalisation process of two firms. In the last sections, the two processes are discussed and some conclusions drawn. A recently executed survey of the Swedish TC industry indicates an increasing internationalisation of the Swedish TC firms over the years. Two decades ago only a handful of them were engaged in foreign operations. More than half of the respondent firms went abroad during the 1960s or 1970s. The trend towards increasing internationalisation continued during the 1980s. In the first four years of the present decade slightly less than 15 per cent of the firms in the survey went abroad (Table 1). At present around fourfifths of the Swedish TC firms have foreign operations.

Table 1 GOING ABROAD BY YEAR Year 1950s or before 1960-1969 1970-1979 1980-1983 No foreign activity yet Total

Per cent of Firms Going Abroad 15 27 24 13 21 100

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TECHNICAL CONSULTANCY IN INTERNATIONALISATION

Internationalisation of the Firm It has been demonstrated that firms gradually commit resources to and learn about foreign markets and international operations. The internationalisation process can be viewed as an interplay between an international learning process and an international resource commitment process. This view, which is built mainly on Johanson & Wiedersheim-Paul (1975) and Johanson & Vahlne (1977), assumes that the fundamental constraint facing firms in their efforts to internationalise is the inadequate knowledge concerning foreign markets and operations. (See also Bilkey 1978 and Cavusgil 1980). Because of the lack of knowledge about foreign markets, firms start by going to countries which resemble the domestic market, that is countries at the least psychic distance and proceed to countries on a greater psychic distance. The concept of psychic distance covers a number of factors, such as cultural differences, and differences in the business climate and the business laws, which make it difficult to get and understand information about a market (Wiedersheim-Paul 1972). For the Swedish firms the countries at the least psychic distance are the Nordic countries. The penetration by the firms in each individual market is also gradual. In order to avoid risk firms start by committing small resources to a particular market. But the resource commitment is gradually increased as knowledge increases and experience on the particular market is gained. Thus, a typical development pattern is to follow the establishment chain; start with no regular exports, later export via agents, still later establish sales subsidiary before a manufacturing subsidiary may be established in a country.

Psychic Distance and TC Firms The risk exposure for TC firms going abroad is markedly different from the risk exposure pattern of manufacturing firms. Manufacturing involves investment in capital and fixed assets. Once assets are acquired and installed, their movement across national boundaries is difficult and expensive. Manufacturing firms going abroad are therefore forced to be cautious and follow a gradual resource commitment process which permits them to acquire information and reduce risk. TC is a professional skill intensive industry, in which professional and skilled labour produce the output and correspond to the "technical core" of manufacturing firms. However, professional consultants are not a fixed asset. They are versatile in nature. The skill possessed by a technical consultant can with slight modifications be utilised in a number of ways and in a number of different countries. Thereby, the market specificity of these resources is relatively low. A professional technical consultant can be moved from one market to the other at short notice, with minor adjustments and at a relatively small cost. Therefore, the risk exposure of TC firms, in this respect, is relatively low, and TC firms may not be forced to hedge risk in the same manner as manufacturing firms. They need not undertake risk reducing measures as described in the internationalisation model and cannot be expected to follow the psychic distance when going abroad. This conclusion is supported by the survey of the Swedish TC firms. They were asked in which country they carried out the first foreign assignment. A majority of the firms started in developing countries, especially in the Middle East and Africa (Table 2). Indeed, only four firms started their foreign operations in a Nordic country, whereas seventeen started in a country in the Middle East International Marketing Review

22 TECHNICAL CONSULTANCY IN INTERNATIONALISATION

or North Africa and eight in the remaining Africa. Another 11 firms started their internationalisation in some country in Western Europe outside the Nordic countries. Table 2 THE GEOGRAPHICAL DISTRIBUTION OF THE FIRST FOREIGN CLIENT Downloaded by UPPSALA UNIVERSITY At 11:50 25 September 2014 (PT)

Area

Per cent Nordic countries 7 \V. Europe (excluding Nordic countries) 18 USA and Canada 3 Latin America and the Caribbean 10 Middle East and Africa 41 Remaining Asia; Australia and New Zealand 13 Communist countries 8

The Establishment Chain and TC Firms In the initial phases, according to the internationalisation model, a foreign market is served through risk minimising arrangements, e.g., through exports either directly or through local agents. In service industries, and especially so in professional services, sales and production of the service cannot be kept separate (Gummesson 1979). Consequently there is no economic basis for special sales units abroad, especially not for sales agents. Thus, risk avoidance will not make TC firms follow the establishment chain. Second, as frequently found in other service industries (Eiglier et. al. 1977; Lovelock 1984), a close and continuous contact between the buying and the selling firm is essential to carry out successfully a TC assignment. This demands proximity between the two. To ease the need for communication, TC firms deploy their employees at the project site and/or near the buying firm. This implies establishment of either a local subsidiary and/ or a local branch office. Indeed, in the majority of the cases a part of the assignment is carried out at the project site and the remaining at the home office. Winter 1987

Another possibility is to manage the communication problem through travel. This is, however, more expensive and time consuming in a large number of cases. Consequently, on receiving a project a TC firm may rapidly establish a local office/ subsidiary abroad without having to follow the establishment chain. Sometimes the establishment of a subsidiary may be preceded by direct service export from the home base. But in other cases a TC firm may establish a local subsidiary right after receiving an assignment abroad. And when the assignment is completed the office can easily be closed and the consultants can move to other markets. In other words, TC cannot be expected to follow the establishment chain either. To conclude, the internationalisation process model does not say very much about the internationalisation of TC firms. Internationalisation in Networks Recent research about industrial marketing and purchasing has shown the importance of lasting relationships between suppliers and customers in industrial markets (Hakansson 1982) and that industrial firms operate in networks of connected relationships between firms (Hägg & Johanson 1982). The firm acquires knowledge about business opportunities through the network and bases its operations and development on the network of relationships. This can be expected to be valid for TC firms too. Internationalisation can be expected to be a result of the characteristics of the network in which the firm operates (Johanson & Mattsson 1986). If the TC firm enjoys relationships with other firms such as equipment suppliers, customers, complementary consultants, and banks, which operate in international networks, the relationships may become bridges to foreign markets.

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Information about foreign market opportunities may be channelled through the network, or firms in the network may pull the TC firm abroad. In the light of the preceding discussion it would be useful to study the internationalisation process of TC firms in depth. In the following we present two cases of internationalisation among the Swedish TC firms. The aim is to trace the role of the network of market relationships in the early international expansion of the firms. The two cases, Kjessler & Mannerstråle (KM) and Jacobson & Widmark (J&W), show two somewhat different patterns of internationalisation and were selected among 20 firms which were studied by face-to-face interviews with their executives. J&W Pulled abroad by equipment suppliers: J&W, founded in 1938, is the third largest TC firm in Sweden with over one thousand employees. In 1983 it had sales of around SEK 200m. Over the years the share of the overseas market in the sales of the firm has increased steadily and in 1983 the overseas market contributed 15-20 per cent of sales. J&W's main fields of activities are geotechnology, designing industrial complexes, soil and rock engineering, etc. J&W made its first foreign market entry in 1947-48. After the second world war the Swedish government decided to donate a childcare hospital to the Norwegian state and the assignment to design the hospital was awarded to J&W. At that time J&W had around 35 employees. The Norwegian hospital was to become similar to a childcare hospital designed by J&W in Sweden and awarded through the same Swedish authority. The assignment was rather small and the initiative came from the project owner side. The second foreign assignment for J&W,

around 1950, concerned designing a steel mill in Norway. The assignment was awarded by a Swedish equipment manufacturing firm called Bröderna Hedlund. From the day of its inception J&W had designed a number of steel mills in Sweden and worked for firms like Granges. J&W had already worked for Bröderna Hedlund in Sweden starting in the 1940s. For example, Bröderna Hedlund supplied equipment to one of Granges steel mills which J&W designed. In the Norwegian project Bröderna Hedlund had a supply contract with a West German firm. J&W prepared all the construction designs, that is, design for the steel constructions, heavy cranes, etc., in the project. The major portion of the work by J& W was executed in Sweden. Later the project was expanded and a crusher and an enrichment plant was added. The consultancy assignment was again awarded to J&W. The third foreign assignment came in the middle of the 1950s and was also in Norway, but for a different owner. The Swedish firm Morgårdshammer recieved a contract for the supply of a steel mill to a firm called Stavanger Steel. J&W had worked for Morgårdshammer in Sweden on various projects and the two firms were close to each other. Immediately afterwards J&W received an assignment from another Swedish equipment supplier called Elkem AB, to design a rolling steel mill again in Norway. The project was located near Stavanger. Even in this case J&W knew the Swedish supplier through assignments in the steel sector in Sweden. After the above mentioned Norwegian projects, J&W carried out a rather small subconsultancy assignment in the steel sector in Finland. The owner and managing director of the main consultant lived in Stockholm, and as the number of technical consultants International Marketing Review

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in the steel sector in Sweden was limited, the owner of the main consultant firm knew people from J&W. J&W's next foreign assignment was in Africa. In the middle of the 1950s the Swedish firm Granges received iron ore mining concessions in Liberia (the LAMCO project). Granges had a management contract and was responsible for management of the entire project, including hiring technical consultancy firms. J&W was earlier associated with the steel mills owned by Granges and moreover, Granges also had bought Bröderna Hedlund in the meantime. J&W was hired by Granges to provide technical consultancy. J&W was given the responsibility to design, among many other details, construction drawings, the crusher plant, the transport band and the power station. J&Ws participation in the project have continued since then. The following foreign assignment was carried out in Canada for the Swedish firm Stora Kopparberg in 1969. J&W had earlier worked for Stora Kopparberg in Sweden on a number of different occasions. For example, Stora Kopparberg owned a steel mill which was partly designed by J&W. In the pulp and paper sector J&W had designed a pulp and paper mill owned by Stora Kopparberg. More or less simultaneously, J&W carried out another assignment for a steel mill for Morgårdshammar in Tunisia. Then J&W carried out an assignment for a Swedish consortium in North Korea. J&W was hired once again by Morgårdshammar. KM Going abroad via other consultants: KM was established in 1934 by two Swedish engineers. From the beginning the firm engaged in TC concerning civil construction. At present KM is among the largest TC firms in Sweden and employs around 350 people. In 1982 the company had sales of SEK 120m. Around one third of the sales was Winter 1987

realised in overseas markets but Sweden is still the largest single country market for the company. Its main areas of operation cover bridge and road designing, designing industrial complex and residential colonies. Up till 1962 KM carried out no foreign assignments. In 1961 a first effort was made to enter overseas markets and two consultants from KM travelled to Saudi Arabia to investigate the business opportunities. Through a Lebanese TC firm, ACE, KM had received information concerning interesting business opportunities in Saudi Arabia. The contacts with ACE were based on a relationship with a Danish consultancy firm, KV Konsult that had earlier worked with ACE. KM's relations with the Danish firm were professional as well as personal. KM is traditionally active in the field of civil engineering, including bridge construction. In the 1950s a new bridge construction technology (called pre-stressed concrete method) was developed by a French and acquired by the Danish TC firm. KM was interested in learning this method and decided to work with the Danish firm. In fact the two firms did not carry out any assignments together, rather the contacts were personal and colleagual in nature. A top executive in KM was an old friend of the top executives in the Danish firm and exchange of views and ideas was rather usual. Thereby, a co-operation between the two firms developed. Through these KM gained contacts with the Lebanese firm. KV Konsult and the directors in the Lebanese consultancy firm had formal as well as personal relationships. One of the directors in KM and the manager of the bridge construction section met the representatives of ACE in Copenhagen, Denmark. In this way the two firms communicated and gradually KM was informed that the Saudi Arabian government

25



was interested in launching a civil construction programme. Their oil income was increasing and the government wanted to develop the country. At this time ACE was employed by the Saudi Arabian government as general consultants and had access to the government planning in the country. The two consultants from KM travelled to Saudi Arabia in September 1961 and stayed in Saudi Arabia for three to four months while negotiations were being held. A number of other consultancy firms were also vying for assignments in the country. Ultimately, KM formed a joint venture with one of the Norwegian competitors, Nord Konsult. The assignments were large and the two firms believed that they would win through cooperation. After a few months of intensive negotiations a legal document was ready for signing. The agreement was awaiting approval and the signature by the king who was away for medical treatment. However, before anything more happened, the king was dethrowned in a coup. The document remained unsigned and the project never materialised. In the spring of 1962, KM received information through contacts in Spain that the country had plans to build roads and needed foreign consultancy. At this time KM was heavily engaged in road designing in Sweden. The information concerning business opportunities in Spain reached KM through a Swedish road designer placed in Spain; he was not an employee of KM, but knew KM and had worked together with KM. Simultaneously, the Spanish directorate for road construction travelled to a number of countries, including Sweden, to look for suitable sources of consultancy and held discussions with representatives from KM;

he later invited the firm to tender for the assignment. After negotiations the Spaniards decided to employ four consultancy firms and KM was among them. A contract was signed in July 1962 and the work started in November 1962. To execute the assignment in Spain a local office was soon established with around 50-55 people. Barring around ten Swedes, the remaining work force was local. Finland was the second market in which KM carried out an assignment. Around 1964 Finland received a World Bank loan to revamp the old and ailing national road network. As stated earlier KM had already executed a number of similar assignments in Sweden. The Finnish government lacked competence in the field and looked for foreign consultancy. KM was hired to develop and suggest the norms for tender evaluations for purchasing services from competing firms. The next market was in Africa. In 1967 KM was invited by the World Bank to take part in a competition for designing a trunk road in Ghana. KM and other firms were asked to suggest solutions to a number of intricate geological and other problems and to suggest appropriate road design. KM won the competition and was awarded the assignment which lasted for approximately two years. In the meantime KM carried out a number of assignments in Portugal. The KM-owned local firm in Spain discovered business opportunities in Portugal as the neighbouring Portuguese government started a number of infrastructural projects. Through its own efforts, but in co-operation with a local bank, KM won a few assignments in Portugal and gradually launched a joint venture with a local firm to improve its chances to win local assignments. In the years to follow it carried out a number of International Marketing Review

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assignments for Portuguese investors. In a parallel development, in spite of its initial fiasco in Saudi Arabia, KM continued its relationship with the Lebanese firm ACE. In the beginning of 1969, the efforts were successful and KM was assigned a project in Saudi Arabia with a Lebanese joint venture between - two firms, namely, ACE and Consolidated Engineering Company. The two Lebanese firms had earlier conducted assignments in Saudi Arabia. The assignment was complex and was the largest single project in the history of KM. The same assignment continued, through branching and extension, for many more years and ultimately came to an end in 1983. In its efforts to go overseas, in 1960 KM and some other Swedish TC firms launched a consortium called Sweco with the idea of winning international assignments. However, all the above-mentioned assignments in Spain, Portugal, Finland, Ghana, and Saudi Arabia, were carried out by KM on its own; the other constituent partners in Sweco did not participate in these ventures. But gradually the new foreign assignments executed by KM were awarded to and executed through Sweco. Through Sweco, KM entered into a number of foreign markets including Iraq, Libya, the Front States in Africa, and North Yemen. How Internationalisation is Based on External Relationships

The importance of external relationships is evident in both cases, although more so in the case of J&W than in the case of KM. In the case of J&W, the internationalisation in the beginning years took place with the assistance of established relationships with other Swedish firms, namely Bröderna Hedlund, Gränges, Morgårdshammar, and Stora Kopperberg. Winter 1987

Indeed, it is fair to state that the Swedish equipment suppliers forced J&W into the foreign market. As they were awarded supply contracts outside Sweden, they needed external TC support to perform the task. They turned to a tested and trusted TC supplier, J&W. For J&W it was important to nurture relationships with its established Swedish customers. J&W had few avenues to maneuver. Refusal by J&W to go abroad to execute the consultancy assignments would have forced the Swedish equipment suppliers to get TC from alternative sources. The most probable choice would have been one of J&W's Swedish competitors. Such a prospect was by no means pleasant to J&W as this would have created avenues for competitors to enter the network of relationships enjoyed by J&W. This would have jeopardised J&W's chances for future business with the same firms not only in the foreign markets but in the Swedish market as well. In KM's case, established relationships played a less important part in going abroad. KM's relationships in the Swedish market were extensive but they had no role in KM's internationalisation. KM's first and second successful attempts to enter the Saudi Arabian market were overwhelmingly a matter of its own efforts and the use of personal as well as business relationships with other technical consultants as bridges. Similarly, in Spain, the first foreign market for KM, KM entered the market through its own efforts based on its own resources; but, the information on the assignment was mediated by a personal relationship. The initial foreign entries by J&W were made in Scandinavian countries. It was at a rather late stage that J&W carried out a project outside Scandinavia, namely, in Liberia. In the case of KM the situation is radically different. Its early assignments,


with the exception of a small assignment in Finland, came in Spain, Ghana and Portugal, that is, countries at a large psychic distance from Sweden. These country patterns were largely a consequence of business opportunities arising through relationships rather than choices based on comparisons of various markets with one another.

firms, including J&W, had their hands full. J&W consequently found no reasons to investigate foreign markets. It was, nevertheless, forced to carry out foreign assignments merely to maintain its relationships with the Swedish clients.


Establishment of Subsidiaries How Intel-nationalisation Starts at Home

The difference in the early internationalisation process of J&W and KM could be attributed to a number of factors. One reason could be that although the two firms were founded at more or less the same time, they started foreign market entry at two very different periods. J&W was established in 1938 and carried out its first foreign assignment only ten years later when the firm was still small in size and had limited resources. KM, on the other hand, carried out its first foreign assignment in 1962 when it was relatively big in size. Moreover, the national and the international market situation during the two periods was different. It is very probable that in the beginning of the 1960s KM noticed symptoms of mounting competition in its traditional market in Sweden. The firm probably had a feeling that the Swedish market was stagnating and the demand for KM's services in Sweden might decrease in the coming years. Consequently, KM formulated and explicit strategy to go abroad to seek business opportunities, and seriously started looking for alternative markets. J&W, on the other hand, carried out its first foreign assignment in 1947-48, long before competition in the Swedish market started surfacing. In the last years of the 1940s and the entire 1950s, expansion in the Swedish TC market was rapid, and the Swedish TC

As KM's assignment in Spain was significant and could lead to new assignments in the future, it established a production subsidiary in Spain soon after the assignment was awarded. In addition to being less expensive the local subsidiary gave KM the opportunity to wave its flag in the market and provided opportunities to establish relationships within the local economy. In the next few years KM followed the same pattern in the other countries, e.g., in Saudi Arabia, Portugal, and Ghana, and established a sales production subsidiary in the host country without following the establishment chain. J&W shows a different establishment pattern. The firm started its internationalisation process in a neighbouring country, Norway, and carried out the assignment from the home base in Sweden. No subsidiary or branch office in Norway was opened and the same pattern followed during the next few years. J&W started its first office/subsidiary abroad in Liberia, Africa. A common feature of the two firms' international development is that the operations abroad have been more or less temporary in nature. When the assignments were completed the firms could have easily withdrawn from the country. This is not in accordance with the internationalisation process of manufacturing firms which is more of a permanent nature. The resources invested in a foreign market International Marketing Review

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by a manufacturing firm are long term commitments to that very market. Withdrawal of such resources is difficult and frequently costly. Our study indicates that the internationalisation process of TC firms is not of the cumulative nature as is often implied in the concept of internationalisation. This is probably due to the very different nature of resource commitment by TC firms as compared with the manufacturing firms. The assumption of an interplay between resource commitments and experiential learning leading to internationalisation does not hold true for TC firms. Internationalisation of TC firms, more than in manufacturing firms, seems to be exclusively a matter of increasing international orientation and experience. The resource commitments are of minor significance. Managerial implications

In view of the importance of external relationships we suggest that strategy discussions should focus on the firm's network of relationships. The following suggestions might provide a useful start. 1. Map the present network of relationships. Which parties at home and abroad have firm, lasting relationships with equipment suppliers, clients, other consultants, financial institutions etc.? How strong and deep are those relationships? The argument for this step is that the existing relationships are among the most important assets of the firm and that the future must be built on them. 2. Analyse how the present relationships have been developed. What is the role of individual consultants of the firm? To what extent are they a result of specific projects or of more general contact handling? Has the firm or its counterparts been W i n t e r 1987

most active in the development? The argument for this step is that relationship development which has been successful in the past will most likely be successful in the future, too. 3. Analyse the possibilities to utilise the present network of relationships as a bridge into new markets. Such bridges may lead directly to new projects, in which case one or several relationships may have to be mobilised. The bridges may also be used for information gathering about foreign projects and networks. To what extent is it necessary to develop new relationships in order to get into interesting markets and networks?

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International Marketing Review


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