SMEs and the Global Marketplace: Top Tactics for Successful Entry
Internationalization is the wave of the future for SME’s. For decades large firms have realized the potential benefits of the global market. Only recently have SME’s attempted to branch out into the global market. Modern technology has helped facilitate this process, enabling smaller organizations to tap into unknown markets. If an SME is to succeed on a global level, it must first understand the multiple challenges it will face entering a foreign market.
Most SMEs tend to operate from a smaller home base, more homogenous population and environment with fewer resources than most large organizations. This can make the process of internationalization more challenging. It is important that SMEs understand the challenges and conditions unique to a foreign market if they are to succeed in the foreign industry. That said there is ample opportunity for SMEs to live in harmer with larger firms and establish a successful global presence.
The purpose of this paper is an evaluation of the process of internationalization from the perspective of an SMEs. Many SMEs have attempted to enter the foreign market, only to fail miserably. This does not suggest however that the global marketplace is only suited for larger firms. Rather it suggests that most SMEs are going about internationalization the wrong way. This paper will discuss what tactics SMEs must adopt, and what strategies they must consider if they are to be successful and strong in the global market. The aim of the paper is an analysis of international trends and market strategies.
Literature Review
SME’s — International Marketing Trends
Before one can understand whether SME’s will succeed in the international market one must first understand the international marketing trends currently influencing the market. More and more SME’s are realizing the advantages and benefits for going global. Large and small size companies stand to gain much from the process of internalization. With internalization come many challenges.
Within the European market, several opportunities now exist for small and medium size firms. Because of the EU, the common market in Europe encourages globalizations. Most physical, technical and fiscal trade barriers within the EU are faded thanks to the creation of the common market, and this market continues to influence market conditions and competition for international firms (Haahti & Hall, 1998). More competition is now available in the domestic market within Europe, in part because complex formalities are no longer of concern for these companies.
Export activities are also much more popular among the EU. Most SMEs interested in this market face uniformity of product requirements and little time facing border controls if they plan on exporting (Haahti & Hall, 1998). This will result in decreased exportation costs. Thus now is a good time for SMEs to get involved in the globalization process. Concerns about quality and logistics are increasingly important as competition continues to grow in the international market (Haahti & Hall, 1998). Thus if SMEs are to succeed, they must focus on quality, flexibility and growth internationally and on the domestic front.
Haahti & Hall (1998) conducted a study of SME’s and the internalization process to determine industry characteristics and trends in these firms and to uncover key international marketing trends. They conclude that small and medium size firms must study the environment of the foreign market closely to succeed. The researchers also find that the internal situation and history of an SME may influence the process of internalization. Most smaller firms face a limited internal resource capacity, thus a comprehensive review including the industry, companies and individuals are necessary before exploring internationalization (Haahti & Hall, 21).
Key Issues/Areas/Challenges faced SME’s when Branding
SMEs face more challenges than larger companies when attempting to brand and market their products and services abroad. Haahti & Hall (1998) suggest that most SME’s share in common the characteristics of family controlled companies. These may include a smaller management team associated with the “owner family” and more rigid rules that may be constraining (p.20).
Haahti & Hall also point out the importance of SMEs understanding the internalization process within the context of a specific industry, company and the people involved in order to boost cooperation. Their research suggests that conditions for industries may be different than conditions for single companies. Larger organizations generally tend to have a more “natural local concentration” that “ultimately implies different strategies from the SME’s with a global focus” (p. 20).
The research suggests that while many theoretical approaches exist explaining and analyzing the internationalization process, few share the same approach (Haahti & Hall, 1998). Multiple studies have confirmed the stage theory of internalization as a valid approach to internationalization (Haahti & Hall, 1998). This approach suggests a lengthy and incremental entry for small and medium firms, and usually entails firms selling a large portion of production on the domestic front (Boter & Homquist, 1994). Typically limited resources require that SME’s plan their export activities well in advance and possibly in cooperation with other organizations (Bartlett & Ghoshal, 1991).
The industry an SME is in may influence their global approach however. A longer and well thought out process is common of many industries except high tech or knowledge intensive firms, which tend to develop internationalization processes much more rapidly on a much less organized scale (Lindqvist, 1991).
Internalization may involve actions occurring at multiple levels both inside and outside of a company (Haahti & Hall, 1998).
Developing Market Entry Strategies SMEs
SMEs success in the international marketplace will depend in part on foreign-market entry choice and country specific factors. For SMEs to succeed it is vital they adapt their entry strategies to conform to international marketing trends. Foreign market strategies typically include contractual agreements, exporting and FDI (Hegge, 2002).
Exporting is a prime market entry strategy. Exporting is convenient for SMEs because it allows production at the organizations home base location (Hegge, 2002). Hegge (2002) also suggests that firms can enter a “trans-border cooperation agreement with one or more firms abroad” in order to enter the market (p.40). These agreements include franchising, subcontracting and licensing in the foreign local without losing their independent ownership.
Foreign direct investments or FDI is another choice. When a small or medium sized company prefers a “cost-minimizing” method of serving a foreign market, many considerations must be examined. Deciding between exporting and FDI as a market entry strategy is one of these choices, contingent on location factors of the market, internalization advantages and “firm specific factors” (Hegge, 41).
Impact Cultural Influences SME’s
Home and target country influences and factors play a significant role in the success or failure of an SME in the global market. The home country and target market will both have according to Hegge (2002) economic, political and socio-cultural “character” that must be considered (p. 41). One significant cultural or locational influence includes the size of the foreign country market (Hegge, 2002).
It is more likely that smaller markets will prefer exporting while larger ones will opt for FDI. However, this is not always the case. Within some internal markets studies suggest that FDI is preferred regardless. This has been the case for countries like the Netherlands and Belgium (Hegge, 2002).
Hegge (2002) also suggests “an atomistic market may be served best through exports; an oligopolistic through FDI” because firms may compete better against competitors (P. 41).
Cultural factors that may impact an SME’s success may include government policies or regulations that may restrict the ability of the SME to operate successfully. In some cases the government may discourage exporting.
The cultural distance between the home country and target market may also impact the organizations’ choice to utilize FDI or exportation. High transportation costs associated with a larger geographical distance may result in FDI instead of exporting for example (Hegge, 2002; Buckley, 1989). Hegge (2002) also suggests that “cultural values, language, social structure and ways of life” affect FDI (p. 42). The greater the cultural distance the greater a barrier for FDI in every country in the EU, as each country has it’s own customs, laws and even history (Hegge, 2002; Buckley & Brooke, 1992).
Haahti & Hall (1998) suggest that “coordination of strategic business functions at different cultural studies is a prerequisite for international business” (p.22). However, few studies exist that confirm what methods organizations currently use to combine or integrate management on a cultural level with the foreign market. Many studies however confirm that political and cultural factors within a country impact market conditions. Studies have linked the “strategic image” or a company with its corporate culture (Haahti & Hall, 1998). It is vital that an organization discover the norms and values within an industry.
Tayed (1998) confirms that much research has focused on natural culture. Some studies have suggested that cultural factors to be considered include the degree of collectivism in a market, the avoidance or acceptance of masculinity and femininity (Haahti & Hall, 1998). Smaller organizations face more challenges than larger ones as the culture of the organization is more often than not dominated by a smaller group of people with a similar history, work experience and power level (Haahti & Hall, 1998).
Lack of Key Market Knowledge SME’s
For SME’s to succeed in the international market, regardless of how easy it is for them to enter the market, they must still develop strategies that are successful. Successful strategies must be based no key market knowledge. Currently research suggests that the European market is a strategically sound investment for most SME’s. It is not however without competition. SMEs need to understand market penetration, development, product development and the importance of diversification if they are to succeed abroad (Haahti & Hall, 1998).
Key market knowledge includes selecting a market penetration strategy that allows a firm to gain more market share using current products (Haahti & Hall, 1998). Market development strategies need to understand what consumer needs are met by current products and what products they can develop and diversify to introduce to customer in the future.
Many SMEs run into problems with ethnocentrism, which predisposes them to make strategic decisions based on the condition of the domestic market; orders from abroad are thus often treated similarly to those in the domestic market when in fact, they are very different (Haahti & Hall, 1998).
Analysis of Global Market
From the research above, one may conclude there is ample opportunity for SMEs to succeed in the global market. International marketing trends suggest that the European market provides the best entry point and starting place for most SMEs. There are challenges that most SMEs face even within the European market however. The primary challenge in this market is competition. There are many strategies an SME may adopt however to overcome competition.
SMEs can go global because many opportunities exist, especially within the European market where barriers to entry are minimal. Market conditions are ripe for entry as the research points out. While more competition is available, this may actually help SMEs develop a better product. SMEs can go global if they create a uniform product requirement as there are few border controls currently in place as well, which will decrease exportation costs as Haahti & Hall (1998) pointed out. Many other SMEs have successfully entered the European market by taking advantage of these beneficial conditions (Haahti & Hall, 1998). Japanese SMEs have attempted to enter the European market, and many succeeded by focusing on quality and being flexible with their marketing strategy (Haahti & Hall, 1998). SMEs that have succeeded in the market have taken much time to study the market extensively. Thus it is important that all SMEs do this in order to succeed.
Market analysis must be carefully and SMEs must analyze their own history and internal capacity, so they understand what approach to take when entering foreign markets. Lastly, for SMEs to succeed they must be open to adapting their cultural practices to meet those of the foreign market they plan to enter. There are many country specific factors that an organization must consider if it plans to succeed abroad. Studies of SMEs entering the EU market confirm that cultural adaptation is necessary for success. Tayed points out that many firms have succeeded by paying close attention to cultural considerations.
Competition when considered strategically, may actually improve an organizations opportunities for success. The key is understanding foreign market needs, wants and desires. Most companies that succeed start with a current product they know fills a consumer need. Over time they can then work on diversifying their product base and filling new needs to remain competitive. They must also assess how they can market their product to show consumers they offer something more than the competition.
SMEs wanting to enter the foreign marketplace may adopt many foreign market entry strategies. The two most common include exportation and foreign direct investments. Many smaller companies do not have the resources necessary to utilize FDI. Exportation may still be a choice. Before any of these strategies can be adopted successfully however, an SME needs to comprehensively evaluate its history, internal processes and workforce.
Most SMEs are challenged because they (1) lack resources and (2) lack adequate market knowledge and (3) operate from a homogenous base. As pointed out in the literature review, the management in many SMEs consists of a small population of like-minded people with similar histories and experience. This can actually inhibit an organizations changes for success in the global market. Most SMEs will have to adopt a slow approach if they plan to succeed in the international market. Exportation may be the best choice, but due to some of the costs involved an SME should consider planning for a lengthy interval before jumping into the market head on.
Conclusions
There is ample opportunity for SMEs to succeed in the global marketplace. SMEs can succeed in international penetration if they follow some simple strategies. That said it may take smaller to medium sized firms a longer time to penetrate foreign markets successfully. Larger organizations often have more resources to engage in international commerce than smaller ones.
The biggest mistake most SMEs make when deciding to enter the foreign market is jumping in headfirst. With the exception of a few high tech firms and other knowledge specific industries, this tactic more often fails than not. Thus SMEs should plan on spending a lengthy interval not only examining their market strategy, but also their internal operations and management.
Because most SMEs represent a relatively homegenous population, it is important these companies study the cultural context of the foreign markets they plan to invest with. They can then adjust operations to meet the cultural needs of the people in the markets they intend to serve. Far too often SMEs fail to consider this, or attempt to push their own cultural and corporate values on a market that is non-receptive. With time and a lengthy planning process, many SMEs are likely to succeed in the international market. This is especially the case for companies that plan to engage in business within the European community. Based on the research, this is the market most likely to remain receptive to business with SMEs.
References:
Buckley, P.J. & Brooke, M.Z. (1992). International Business Studies — An Overview.
Oxford: Blackwell Publishing.
Haahti, A. & Hall, G. (1998). The internationalization of SMEs: The Interstratos project. London: Routledge.
Bartlett, C.A. And Ghoshal, S. (1991) ‘Global strategic management: Impact on the new frontiers of strategy research’, Strategic Management Journal, 12 Special Issue — Summer: 5-16.
Buckley, P.J. (1989). “Foreign direct investment by small and medium size enterprises:
the theoretical background.” Small Business Economics, 1(1): 89-100.
Boter, H. And Holmquist, C. (1994) ‘Internationalization of small and medium-sized industries in manufacturing’, Interstratos, Version 4:1991-1992-1993-1994. Umea, Sweden: Umea Business School.
Hegge, B. (2002). Smes and European integration: Internationalization strategies.
London: Routledge.
Lindqvist, M. (1991) Infant Multinationals — The Internationalization of Young,
Technology-based Swedish Firms, Dissertation: Institute of International Business, Stockholm School of Economics.
Tayed, M. (1998). Organizations and National Culture. London: Sage
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