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The Effects of Export Stimulation: Implications for Export Performance DAVID B. STEWART & ANDREW McAULEY David Stewart, Faculty of Business, Memorial University, St John's, Canada A1B 3X5. Tel 709 737 4007. Fax 709 737 7680. E-mail [email protected]

The Effects of Export Stimulation: Implications for Export Performance DAVID B. STEWART & ANDREW McAULEY David Stewart, Faculty of Business, Memorial University, St John's, Canada A1B 3X5. Tel 709 737 4007.

Abstract The relationship between initiating export stimuli and export performance is examined within the context of four specific types of export marketing strategies. The nature of the export stimulus is seen to be associated with performance for some types of strategy but not for all. Consequently, export marketing strategy acts as a moderator of the relationship between export stimuli and the performance of an export venture. Introduction This paper seeks to bring together the knowledge from two research themes that have strong historical roots in the export marketing literature. The first of these concerns export performance. The export marketing literature contains a variety of studies seeking to establish the determinants of export performance, for example, Bilkey (1978); Aaby and Slater (1989); Koh (1991); Madsen (1989); Cavusgil and Zou (1994); Styles and Ambler (1994). In particular, Cavusgil and Zou (1994), building upon the work of Aaby and Slater (1989), used the contingency paradigm from strategic management to illustrate that export performance is the result of the fit between export marketing strategy and the exporting firm's internal and external environments. The second research stream concerns an aspect of export behaviour, namely, export stimulation, or the factors that stimulate initial adoption of exporting activities. Although the term, "export stimuli" applies broadly to those factors that influence both the initiation and the sustaining of exporting activity, in this context we shall confine it to those factors that motivate the start up of an export venture. The nature of export stimulation has been shown to affect the internationalisation of a firm, Welch and Wiedersheim-Paul (1980). Reviews of the literature in this theme are found in Katsikeas and Piercy (1993); Leonidou (1995). In addition, examples of the various stimuli can be found in Barker and Kaynak (1992); Czinkota (1982). A commonly used typology of export stimuli is to regard them as emanating either internal or external from/to the firm, Brooks and Rosson (1982). Internal stimuli are those derived from influences endogenous to the firm, for example, economies of scale, or particular in-house competencies. On the other hand, external stimuli stem from the environment in which the firm operates, or may operate, e.g., government export promotion programs, or the bankruptcy of a competitor.

Export stimulation is important to both policy makers and to management within a firm, particularly a small or medium sized operation. Governments expend considerable funds either directly through subsidising export initiation through attendance at trade shows, or indirectly through the provision of a variety of people based and Web based self-help services. Similarly in the private sector, poorly or incorrectly motivated firms may have their internationalisation process inhibited or even stalled because the realities of their chosen export venture do not coalign with their expectations. Research Objectives The overall purpose of this research is to examine whether an association exists between the nature of export stimuli and the performance of an export venture. The results of the research are applicable to a restricted population of small, medium sized manufacturing firms. The population is restricted in the sense that only firms that have both domestic and export market activity are included. More specifically the study has the following objectives: • • •

To investigate whether export performance varies according to whether the initiating export stimuli for the venture were internal or external to the firm. In brief, this implies that the locus of the stimulus is associated with the ultimate performance of the venture. To investigate whether export performance varies according to whether the reasons for initiating the venture are based on proactive or reactive behaviour on the part of the firm. To investigate whether the type of export strategy selected by the firm has a moderating influence upon the above relationships.

In order to realise these objectives the paper proceeds in the following manner. Firstly, a theoretical framework is presented, then this is followed by descriptions of the various constructs included in the framework. A description of the empirical derivation of four particular types of export strategies is presented, followed by the methodology used in the research. The penultimate section contains some empirical findings, and the paper concludes with a discussion of the conclusions and some suggestions for future research in this area. Theoretical Framework Styles and Ambler (1994) ; Aaby and Slater (1989) ; Cooper and Kleinschmidt (1985) amongst others have demonstrated that export performance is influenced by the chosen export marketing strategy and this in turn is influenced by many factors, including i) the export market environment; ii) the industry; iii) the firm and its management; iv) the nature of the product. Although dealing with global strategy rather than export strategy, Zou and Cavusgil (1995) provide a comprehensive conceptual framework of the strategy construct, which can be applied to export strategy. Global strategy is posited to be influenced by two types of factor : i) internal organisational factors (market orientation, capabilities etc), and ii) external drivers (technology factors, market factors etc). A key feature of this framework is that it is a combination of ideas from both the Industrial Organisation (IO) approach to strategic management, and the more recent resource based, internally oriented view of strategy and performance, Barney (1991). For

our purposes, each of these two types of factor can be regarded as triggers for export stimuli. For example, organisational capabilities may create economies of scale which act as a stimulus to seek new (export) markets to absorb the increased volume. Similarly, changing regulations within a regional trading block may increase the attractiveness of a particular export market. As the EU moves closer to uniform product standards, a small Canadian manufacturer may be motivated to enter the Italian market. These examples illustrate that Zou and Cavusgil's (ZC) framework is capable of explaining both internal and external stimuli for exporting. This type of categorisation of stimuli is found in, for example, Leonidou (1995); Albaum, Strandskov, and Duerr (1998). The ZC framework is also useful in explaining an additional common categorisation of export stimuli, namely whether the stimulus is proactive or reactive. Proactive stimuli characterise export behaviour grounded in, for example, seeking to take advantage of a particular organisational competence (e.g. superior quality). Since the framework incorporates the resource based view of the firm, it implicitly includes a proactive stance. The resource based model is founded upon the idea that competitive advantage can be developed through the integrative deployment of the firm's resources, Hitt, Ireland and Hoskisson (1997). On the other hand, reactive stimuli are based on pressures or push factors derived from either the external or the internal environment of the firm, leading to passive behaviour. Examples of such push factors are a) a declining domestic market; b) under-utilised capacity --- the former reflects the IO view of the firm, while the latter is based upon organisational competencies/resources reflecting the resourced based view. Consequently, the ZC framework may be used to incorporate and test the potential influences of a variety of types of export stimuli upon export performance. This is illustrated in Figure I. Figure I An Integrated Conceptual Framework of Export Stimulation and Export Performance Internal Factors Capabilities Commitment Experience

External Drivers Market Related Competition Environmental

Stimuli Internal External Proactive Reactive

Export Performance

Export Marketing Strategy: Type of Strategy

In the following sections details are presented of three of the constructs in the Figure I, namely, Export Performance, Export Stimuli and Export Strategy, together with operational definitions. The Export Performance Construct Export performance is recognised as a multi-dimensional construct, for example, Cavusgil and Zou (1994); Styles (1998); Shoham (1998). Consequently, four measures of export performance were used in this study. These were i) an overall measure of "perceived success" of the venture by the CEO/ Export Manager on a ten point scale; ii) sales growth over each of the first three years of the export venture. These measures have been used before in the more recent export performance literature. Export Stimuli Export stimuli can be categorised in a number of ways. Leonidou (1995) and Albaum et al (1998) both used a four-way classification to characterise the variety of stimuli that firms may experience. Their classification is based upon two dimensions, namely the locus of the stimulus (internal or external to the firm), together with the nature of the behaviour stimulated, proactive or reactive. Albaum et al (1998) recommend that stimuli be classified according to the crosstabulation of these two dimensions, thus generating four categories of stimuli. In terms of measuring stimuli, export mangers/CEO's were asked to provide an unaided recall of their two main reasons for initiating a specific export venture. Consequently, the stimuli examined in this study relate to export startup, and not to sustaining existing export activities. These were read by the researcher, plus two other professors of Marketing and classified according to whether a) the locus of the stimulus was internal/external to the firm, and b) whether the export activity is due to proactive/reactive behaviour on the part of the firm. At the first pass, all three experts agreed on 82% of their classifications. The remaining were discussed in an effort to reach consensus, leading to a final sample size of 141 with 19 questionnaires rejected due to either differing opinions amongst the experts, or incomplete entries in the questionnaire. The Strategy Construct The strategy construct used in this study was a combination of two particular marketing strategies used by exporters. The first reflected aspects of domestic marketing strategy whereas the second reflected the firm's export marketing strategy. Domestic marketing strategy was regarded as having two domains --- scope and competitive positioning (the marketing mix), and was measured using instruments developed by Robinson & Pearce (1988); McDougall and Robinson (1990). Five point semantic differential scales were used to the dimensions of domestic strategy. An example of one of the scales used to assess the width of the domestic product mix is given below. Provide Narrow Range of Products

1

2

3

4

5

Provide Broad Range of Products

CEO’s or Export Managers were requested to select an appropriate response upon the five point scale that reflected the width of their product mix. In all, seventeen (17) variables were used to assess the following five dimensions of the firm’s domestic marketing strategy: market scope ; product, pricing, promotion and distribution strategies. Information on the reliability of these scales is presented in McDougall & Robinson (1990). Export marketing strategy was also assessed in terms of scope and competitive positioning. In particular, five dimensions were examined: market scope, the degree of product and promotional adaptation; the level of support given to the foreign distribution channel, and export pricing. A total of twelve (12) measurement variables were used to assess these aspects of export marketing strategy. Again five point semantic differential scales were used to assess these variables. Cavusgil and Zou (1994) present findings upon both the content validity, and reliability of these scales. The strategy construct was operationalised through the use of Euclidean cluster analysis to derive four strategic composites, Stewart (1998). The details of how these composites were derived are summarised in the following section on Methodology. According to Stewart (1998) these may be labelled as Top Ender, Cost Cutter, Competitor, and Broadliner strategies. Each of these is described below. Details of the data used in the cluster analysis are presented in the Methodology section. Methodology Data Collection The data for this study were collected by means of a mail-out questionnaire to a random sample of export contacts in 800 small and medium sized UK manufacturing firms selected randomly from the FAME1 database. A total of 178 responses were obtained after follow up, of which 160 were useable, giving a final response rate of 20%. Since it was desired to test results relevant to small, or medium sized exporters, firms were sampled according to the following criteria: 1. Total Annual Sales less than 10 million GBP; 2. Number of Employees less than 100; 3. Export Sales of between 5-75% of total sales. The questionnaire included the following sections: 1. Characteristics of the firm, including details of involvement in international trade; 2. The Marketing Strategy adopted in the Domestic Market; 1

FAME is a financial database containing information on 270,000 major public and private British companies from the JordanWatch and JordanSurvey databases.

3. The Export Marketing Strategy adopted for an export venture; 4. Reasons for Initiating the Export Venture. 5. Measures of Export Performance. Derivation of the Strategic Composites A three step process was used to derive the strategic composites. As mentioned above, a total of twenty nine strategic variables (17 for domestic and 12 for export) were used to assess the domestic and export marketing strategies of SME's. A number of significant zero order correlations were found for pairs of variables, indicating that an underlying structure probably existed in this set. Consequently as a first step it was decided to use factor analysis to achieve some parsimony. The twenty- nine strategy variables were standardised and submitted to a factor analysis. Nine factors were isolated with eigenvalues greater than one, accounting for 62% of the communality amongst the twenty- nine strategic variables. Space limitations prevent a full listing of this analysis here. However, full details of the factors, including factor loadings , after Varimax rotation, are available from the authors. In summary, three of the nine factors were concerned with export marketing strategy, and the remaining six describe aspects of domestic marketing strategy. The three export marketing factors reflected the degree of foreign channel support; the degrees of promotional and product adaptation. Whereas, the six domestic marketing factors mirrored the following aspects of domestic marketing strategy --- i) market scope ; ii) product strategy; iii) product positioning with respect to value; iv) promotional strategy; v) channel strategy and vi) the firm's experience with the product. The second step in the process of deriving the strategic composites was to apply Euclidean Cluster analysis to the nine factors derived in the first step. A major issue with cluster analysis is how to arrive at the appropriate number of clusters. Lehmann (1979) has provided some initial guidelines, indicating that reliable clusters derived from survey data fall in the range n/50 to n/30 where n is the useable sample size. Given a sample size of 160 this means that the appropriate number of clusters falls in the range of 3 to 5. Hierarchical clustering was used initially to derive solutions within this range. Hair, Anderson, Tatham and Black (1995) suggest that cluster tightness be included in the criteria used to determine the appropriate number of clusters. Cluster tightness can be measured by the within cluster sum of squares. The percentage increases in the within cluster sum of squares were calculated as we move successively from a 5 to a 4 cluster solution and from a 4 to a 3 solution. These were 11.0% and 15% respectively. This suggests a five or four cluster solution is appropriate. Non-hierarchical clustering was applied to produce four and five cluster solutions. On examining the five cluster solution, it was observed that one of the clusters was the result of the partitioning of one of the clusters from the four solution into a fifth unfocused cluster that was difficult to interpret. The remaining four clusters from the 5 solution mirrored those of the 4 cluster solution. The distribution of the sampled firms for the 4 cluster solution is shown in Table I.

Table I: Cluster Sizes Cluster

No. In Cluster

% Total

1

54

34%

2

51

32

3

36

23

4

19

12

The third and final step in deriving the strategic composites consisted of examining the cluster centres or averages for each of the original twenty nine strategic variables. A table of these is presented in the Appendix. Each column in this table represents a profile of the combination of export and domestic marketing strategies used by the sampled SME's in each of the four empirically derived clusters. From this we can obtain a sense of the composite (domestic and export) strategies used by firms in each cluster. The Four Strategic Composites The information from the table in the Appendix was used to devise profiles of the four strategic composites. These are described below. The Top End Nicher (Cluster 1) This group consisted of fifty four firms or 34% of the sample. These firms used a focus strategy in their domestic market, offering a very narrow product range to a few segments within a small geographic area. They are product innovators producing specialty products. Essentially they offer a prime product at a premium price. Promotional expenditures are relatively high as they seek to develop a strong brand recognition. Multiple channels are used and they continually seek to find new means of distribution. Perhaps because they are continually developing new products, they have the lowest level of experience with their current product mix. On average, firms in this group had an average of 57 employees, the second largest in the sample. The export strategy adopted by these firms is built around a high degree of product adaptation, particularly after market entry. A similarly flexibility is displayed in the promotional strategy used, particularly with respect to the promotional approach used. A high level of support is provided to foreign distributors/agents in form of promotional support and training. The average percentage of total sales from exporting is 36% for this group ---- the lowest of the four strategic composites. Cost Cutter (Cluster 2)

Fifty-one firms or 32% of the sample were categorised in this group. This group has a moderate product range which they offer to a small number of targets. They are the least innovative, tending to maintain their current products, offering high quality products at a low price. They have the lowest promotional expenditures and use a variety of channels to distribute their products. They have a lot of experience with their products. The average number of employees per firm was 48, making them the smallest firms in the study. The highlights of their exporting strategies are i) an above average degree of product adaptation that they employ before market entry ; ii) the low level of support that they provide to the foreign channel, and iii) the standardised promotional approach they use. Presumably this means that their incremental promotional expenditure is low in foreign markets. The average percentage of total sales from exporting is 36% for this group ---- the same as that for the previous group. The Competitor (Cluster 3) The third group consists of thirty-six firms or 23% of the sample. These firms employ a niche strategy in their domestic markets, targeting a moderate product range to a small number of customers within particular geographic areas. They offer specialty products but are not known for product innovation. Products are competitively priced. Promotional expenditures are below average with firms in this group being the least concerned about developing brand recognition. Perhaps because of the small number of customers concentrated in specific regions, they use few channels of distribution. On average these firms have 51 employees. Export marketing strategy is grounded in offering high degrees of support to the foreign channel and upon standardisation. Both product and promotional adaptation are minimal. Exporting is a major priority for these firms since an average of 51% of total sales is derived from it. The Branded Broadliner (Cluster 4) The final group is the smallest, consisting of 19 SME’s or 12% of the sample. These firms offer a broad product range to numerous segments over a wide geographic area. They offer specialty products and are continually innovative. Pricing strategy is built around offering reasonable quality at competitive prices. Promotional expenditures are high as they have strong concerns about developing brand identity. Distribution intensity is selective rather than exclusive and they are continually developing new marketing channels. These are the largest firms in the study, having on average 80 employees. They have a lot of experience with their products which have been on the market for approximately 47 years. These firms are adaptors ------ they adapt both their promotional approach and their products to suit their target markets. Although they provide the highest overall support to the foreign channel, only average support is provided for training and promotion. These are the most experienced firms in international trade, having an average of 28 years involvement per firm, and being involved in 22 foreign markets. On average, 45% of total sales is derived from exporting.

Empirical Results The potential effects of differing export stimuli upon export performance were investigated for firms using each of the strategic composites isolated earlier. As indicated, four measures of export performance were used in the study --- i) a subjective assessment of success on a ten point scale ; ii) the percentage sales growth for each of the first three years for the export venture. All of the measures were on ordinal scales, hence it was necessary to use a non-parametric statistical test to examine differences. The Kruskal-Wallis test can be used to test for differences in ordinal data, Berenson and Levine (1992). The K-W test was applied across the four export stimuli categories recommended by Leonidou (1995); Albaum et al (1998). These categories were i) external/proactive; ii) external/reactive, iii) internal/proactive, and iv) internal/reactive. The Chisquare for the K-W test and significance levels are presented in Table II. Table II Export Performance and Export Stimuli Sales Growth Year 1 Top Ender Chi-Square Significance Cost Cutter Chi-Square Significance Competitor Chi-Square Significance Broadliner Chi-Square Significance

Sales Growth Year 2

Sales Growth Year 3

Export Success

6.254 .044

0.861 .650

0.406 .816

4.032 .133

3.323 .190

.632 .729

1.427 .490

1.315 .518

0.788 .674

0.946 .623

0.119 .942

4.371 .112

1.968 .374

7.923 .019

8.039 .018

0.564 .754

One of the chi-squared statistics under the "Top Ender" heading in the table is large enough to be considered as revealing significant performance differences across the four types of stimuli (significance level 0.044). Consequently, there is some limited evidence of an association between the type of stimuli and sales growth in the first year of the export venture, depending upon the type of strategy selected. Specifically, firms using Top Ender strategies who were motivated by external/proactive and external/reactive stimuli had significantly higher sales growth than those motivated by stimuli from the other two categories. Examples of the former stimuli include items such as : i) the identification of foreign market opportunities; ii) the influence of change agents, e.g., government agencies, trade associations. Whereas examples of the second category of stimuli include i) intense domestic competition; ii) receipt of unsolicited orders. The table also illustrates that performance differences show up in the early phases of the

export venture for these firms, i.e. in year one. By years two and three, there are no significant performance differences for Top Enders. Table II also indicates that export stimuli were associated with the performance of the venture for one other group of firms, namely those using the Broadliner strategies. However, unlike Top Enders these differences emerge later in the venture --- during the second and third year of the venture. Specifically, firms using this strategy who were motivated by internal/proactive stimuli had significantly higher sales growth in both years two and three than those motivated by stimuli from the other three categories. Examples of these stimuli include i) economies of scale; ii) possession of specific competitive advantages. These results suggest that both locus and behavioural aspects of export stimuli influence performance, conditional upon the type of export strategy selected. Consequently, it was decided to conduct separate analyses of these two dimensions of stimulation. Export stimuli may be classified as arising from factors that are either external or internal to the firm (the locus), and also according to whether they are of a proactive/reactive nature (behavioural), Leonidou (1995). The potential effects of these categorisations on export performance were examined using the Mann-Whitney test, Berenson and Levine, (1992). The results for the external/internal classification are presented in Table III. Table III Export Performance and Locus of Stimuli Sales Growth Year 1 Top Ender Mann-Whitney U Significance Cost Cutter Mann-Whitney U Significance Competitor Mann-Whitney U Significance Broadliner Mann-Whitney U Significance

Sales Growth Year 2

Sales Growth Year 3

Export Success

85.500

141.000

145.000

105.000

.016

.375

.567

.053

60.500

61.000

52.000

47.500

.940

.903

.576

.281

78.000

89.500

73.500

67.500

.504

.835

.942

.257

19.500 .180

6.500 .005

8.500 .010

34.000 .892

As can be seen, again significant results were found for firms using Top Ender and Broadliner strategies. Firms using Top Ender strategies who were motivated by external versus internal

stimuli had significantly higher sales growth in the first year of the export venture. Similarly, these firms regarded their venture as being significantly more successful. By the far the most commonly cited external stimulus was the demand potential of the selected export market. Thirty one percent of Top Ender firms listing external stimuli indicated that this was the primary reason for initiating their export venture. For Broadliner firms, significant differences in performance showed up in the later years of the venture. Firms who were motivated by internal stimuli had significantly higher sales growth in the second and third years of the export venture. The most common reasons for exporting cited by these firms were i) the desire to increase sales, and ii) the competitive advantage of superior quality. No significant results were found for the effects of proactive/reactive behaviour upon any of the export performance measures. Conclusions The purpose of this article was to draw together two historical research streams in the Export Marketing Literature, namely the nature of Export Stimulation and the determinants of Export Performance. It has been demonstrated that the effects of export stimulation upon performance are conditioned by the export strategy adopted by the firm. For some strategies, for example, Cost Cutters and Competitors, the initiating motives of the firm play little to no role in determining the performance of an export venture. However, for others, most notably Top Enders, the nature of the stimulus does play a role in determining performance. Reference to the earlier descriptions of the four strategic composites, illustrates that Top Enders tend to have an external focus. Firstly, since they follow a niche strategy it is important that they scan export market opportunities for segments with the appropriate characteristics for their product. Secondly, their export strategy is grounded in adaptation, particularly after entry. Consequently, they appear to use their experience of the export environment to alter both product/promotional strategies. Finally, these firms provide strong support to their foreign distributors --- again illustrating their external focus. On the other hand, Broadliners are positioned to provide reasonable quality, branded products at reasonable prices. This suggests a competency based approach or an internal orientation. In summary, firms that are motivated by stimuli whose nature fits with their strategic orientation tend to achieve higher performance in exporting. From a conceptual perspective, this analysis underscores the importance of incorporating both the IO and resource based views in a strategic framework designed to explain the influence of stimuli upon export performance. Further since export performance is a multi-dimensional construct, in a broad sense including both financial and strategic aspects, future research is needed to develop a paradigm capable of explaining the association between the nature of export stimuli and these distinct dimensions of performance.

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Appendix: Cluster Averages for Export and Domestic Strategic Variables 1

Cluster 2 3

4 Overall Support given to the foreign channel. Promotional support 2.80 2.21 3.01 2.63 2.64 Training support 2.91 2.29 2.87 2.68 2.68 Support for Distribution 3.31 2.94 3.43 3.74 3.27 Degree of salesforce training 3.64 3.24 3.62 2.53 3.38 Degree of Promotional Adaptation Adaptation of package 2.38 2.16 1.95 2.79 2.26 Adaptation of label 2.85 2.47 2.27 3.58 2.69 Adaptation of approach 2.71 2.14 2.18 3.05 2.45 Adaptation of positioning 2.38 2.47 2.18 2.95 2.43 Degree of Product Adaptation Adaptation before entry 2.46 2.57 2.24 2.68 2.47 Adaptation after entry 2.59 2.49 2.38 2.53 2.50 Export Pricing 3.44 3.73 3.44 3.63 3.55 Domestic Scope Geographic scope 2.54 2.33 2.25 3.66 2.80 Width of product range 2.54 2.78 2.75 3.57 2.96 # customers 3.04 3.23 2.75 3.57 3.18 # targets 3.16 2.15 1.98 3.45 2.81 Domestic Product Strategy Type of product 2.11 2.39 2.03 1.53 2.11 Degree of npd 2.00 2.92 2.71 1.84 2.43 Value Product Quality 4.00 4.22 3.64 3.79 3.96 Pricing 3.48 3.08 3.29 3.37 3.30 Domestic Promo Strategy Promo Expenditure 2.83 1.98 2.37 3.00 2.48 Time in market 12.1 15.7 13.2 46.6 17.6 Brand Recognition 3.74 3.31 3.27 4.16 3.55 Domestic Channel Strategy # channels used 3.57 3.54 2.65 3.53 3.35 Channel innovation 3.69 3.57 2.98 4.21 3.55 Experience with Product Experience with Product 3.69 4.55 4.39 4.58 4.23 Degree of customer service 4.33 4.53 3.93 4.47 4.32 Notes: 1. All variables except Α Time in market≅ were measured on a five point scale. 2. Three strategic variables that did not load appreciably on any factor are not included in the table.