Small Firm Internationalization and Business Strategy


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Small Firm Internationalization and Business Strategy

  1. 1. is International Small Business Journal Copyright © 2004 SAGE Publications (London, Thousand Oaks and New Delhi) b DOI: 10.1177/0266242604039479 Vol 22(1): 23–56 j Small Firm Internationalization and Business Strategy An Exploratory Study of ‘Knowledge-intensive’ and ‘Traditional’ Manufacturing Firms in the UK JIM BELL University of Ulster, UK DAV E C R I C K University of Central England, UK S T E P H E N YO U N G University of Strathclyde, UK The objective of this study was to explore the linkages between the overall business strategies of small firms and their patterns, processes and pace of internationalization. A qualitative approach was adopted, involving 30 in- depth interviews with key decision makers of internationalizing small firms based in 3 UK regions (15 ‘knowledge-intensive’ and 15 ‘traditional’ firms). The findings suggest that business policies, including those linked to ownership and/or management changes, had an important influence upon the international orientation of many firms. There were close relationships between product policies and market focus, with product or process innovation often providing an important stimulus to international expansion. However, differences existed in the patterns, processes and pace of internationalization between small ‘knowledge-intensive’ and ‘traditional’ manufacturing firms. The implications of these results on firm strategy, public policy and theory development are discussed and a series of research questions are postulated for future investigation. K E Y WO R D S : internationalization; ‘knowledge-intensive’; SMEs; ‘traditional’ manufacturing firms; United Kingdom Introduction The literature on the internationalization process of small firms has been reviewed by a variety of authors (see for example Andersen, 1993; Leonidou and 23
  2. 2. International Small Business Journal 22(1) Katsikeas, 1996). Therein, various conceptualizations are postulated including contingency, establishment chain, ‘stage’, network and resource-based theories. Recently, Coviello and McAuley (1999: 223) concluded that: ‘. . . SME [small- and medium-sized enterprise] internationalization is best understood by integrating major theoretical frameworks’ and called for ‘future research based on a more holistic approach to conceptual thought, empirical work and methodo- logical development’ (see also Fletcher, 2001). Recognizing the variety of frame- works employed in prior research in the area and the diverse findings, we report on a recent study designed to further investigate issues pertaining to SME inter- nationalization. The aims of the research were: first, to explore internationaliza- tion behaviour within the holistic perspective of small firms’ overall business growth strategies; and, second, to identify any differences in the patterns, processes and pace of internationalization of smaller ‘knowledge-intensive’ and ‘traditional’ firms within the manufacturing sector. The research focused on small firms because of their recognized importance to economic activity, employment, innovation and wealth creation in many countries (Acs et al., 1997; Katsikeas et al., 1998). Moreover, improving the inter- national contributions of the small business sector is widely regarded as an increasingly important policy priority and the focus of public policy support in many countries (Crick, 1997; EIM/ENSR, 1993; United States Small Business Administration [US SBA], 1993; McNaughton and Bell, 2001; Organisation for Economic Co-operation and Development [OECD], 1997). Factors such as changing consumer preferences, developments in manufacturing, communi- cation and information technologies, and changing competitive conditions provide a favourable environment for small firm internationalization now and into the future. Exploring the diverse experiences of ‘knowledge-intensive’ and ‘traditional’ firms is important from both academic and public policy perspectives since within the former category, in particular, are ‘born global’ firms that compete globally virtually from inception (Crick and Jones, 2000; Knight and Cavusgil, 1996; McKinsey & Co., 1993; Madsen and Servais, 1997). In this study, the term ‘internationalization’ is used in the same context as that defined by Welch and Luostarinen (1988), as ‘the process of increasing involve- ment in international markets’. Business strategy is used as an umbrella term to denote the broad range of strategic options open to the firm, including both organizational and functional management strategies, product/market strategies, and diversification strategies.1 ‘Knowledge-intensive’ firms are defined, following Coviello (1994), as those ‘having a high added value of scientific knowledge embedded in both product and process’. Although the term is widely used to describe ‘knowledge based’ firms, typically in information and communication technologies (ICT), it has been extended in the present study to incorporate high- technology manufacturing firms in other sectors (see also the Research Focus and Method section). The empirical research focused on ‘traditional’ or ‘knowledge-intensive’ manufacturing firms in three locations. At each, 10 in-depth interviews were conducted with CEOs or Export Managers of internationalizing firms (5 ‘traditional’ and 5 ‘knowledge-intensive’) i.e. making 30 interviews in total. The 24
  3. 3. Bell et al.: Internationalization and Business Strategy patterns and pace of firm internationalization were investigated and the relation- ship between domestic and international activity explored within the broader context of the overall business strategy of the firms. Following a review of extant theories of small firm internationalization, the methodology adopted in the study is outlined and justified. Thereafter, findings are presented and discussed and issues for future research identified. Finally, the implications for research in the area and for public policy in support of small firm internationalization are considered. A Critical Review of the Theoretical Frameworks of Small Firm Internationalization Internationalization Behaviour Much of the early literature on internationalization behaviour concludes that the process involves a series of incremental ‘stages’ whereby firms gradually become involved in exporting and other forms of international business. As they do so, they commit greater resources to the foreign market/s and target countries that are increasingly ‘psychically’ distant (Bilkey and Tesar, 1977; Johanson and Vahlne, 1977; Cavusgil, 1980; Czinkota, 1982). Although the number of stages differs, a common underlying assumption of extant ‘stage’ models is that firms are well established in the domestic market prior to developing international strategies. Despite continued enthusiasm and support among many researchers for this notion of incremental internationalization (Leonidou and Katsikeas, 1996; Petersen and Pedersen, 1997; Ellis and Pecotich, 1998), criticisms of this view were being made as long ago as the late 1970s (see for example Bell, 1995; Buckley et al., 1979; Cannon and Willis, 1981; Reid, 1983; Rosson, 1984; Turnbull, 1987). Indeed, Andersen’s (1993) conceptual critique focused on the weak theor- etical underpinning of many of the models and the lack of congruence between theory and practice. He concluded that their ability to delineate boundaries between stages, or adequately explain the processes that lead to movement between stages, was rather limited. Moreover, the applicability of ‘stage’ theories to internationalizing service firms has also been questioned (Chadee and Mattsson, 1998; Knight, 1999). In the last decade a new stream of research has emerged into ‘born global firms’ (McKinsey & Co., 1993; Madsen and Servais, 1997). Also known as ‘inter- national new ventures’ (McDougall et al., 1994; Oviatt and McDougall, 1994), ‘committed internationalists’ (Bonaccorsi, 1992) and internationally focused ‘knowledge-intensive’ firms (Bell, 1995; Boter and Holmquist, 1996; Coviello, 1994; Jones, 1999), these tend to be smaller firms formed by active entrepreneurs. Typically, their offerings involve substantial value added, often due to a signifi- cant breakthrough in processes or technology (Knight and Cavusgil, 1996). A characteristic is that management adopts a global focus from the outset and embarks on rapid and dedicated internationalization (Jolly et al., 1992; McKinsey & Co., 1993; Bloodgood et al., 1996). According to Knight and Cavusgil (1996), the emergence of such firms can be explained by recent trends such as advances 25
  4. 4. International Small Business Journal 22(1) in information and communication technologies, the increasing role of niche markets, and the growth of global networks, which are facilitating the develop- ment of mutually beneficial relationships with international partners. There is little doubt that these trends will increasingly exert a strong influence on small firm internationalization. What is also clear from these authors’ discussion of the ‘born global’ phenomenon, is that firms with ‘an international vision . . . from inception’, or soon thereafter, (Oviatt and McDougall, 1994), present a substantive challenge to internationalization ‘stage’ theories and the notion of incremental internationalization (see also Madsen and Servais, 1997). Indeed, divergent empirical results have led many authors to seek alternative frameworks to the internationalization process models. The internalization/transaction cost paradigm represents a generally accepted model in the international business field, with substantial empirical support especially in respect of the foreign direct investment (FDI) decisions of multinational enterprises. The paradigm has been applied to the early inter- nationalization stages by Anderson and Coughlan (1987) who argued that integration of marketing and distribution functions may be preferred when the firm possesses specialized knowledge and when agents are difficult to find. However, McDougall et al. (1994) found that in some international new ventures, entrepreneurs did not make internationalization decisions on the basis of lowest cost locations; and neither did they attempt to internalize activities to the point where the benefits of further internalization were outweighed by the costs. Furthermore, strategic alliances were found to be common for international new ventures even though the firms ran the risk of losing proprietary know-how through opportunistic partner behaviour. Increasing interest has also been shown in network theory and international- ization (Benito and Welch, 1994; Johanson and Mattsson, 1988; Johanson and Vahlne, 1992). Based on detailed case studies of four software firms, Coviello and Munro (1997) conclude that: . . . our understanding of the internationalisation process for small firms, at least small software firms, can be enhanced by integrating the models of incremental internation- alisation with the network perspective. (Coviello and Munro, 1997: 379) These authors suggest that this externally driven view of internationalization (the external web of formal and informal relationships) provides additional insights to the internally driven perspective of Johanson and Vahlne (1990). In the latter, the evolution of internationalization is based on managers’ cognitive learning and competency development, which gradually increases through experience. There is no question that network relationships with partners (both direct and indirect) offer helpful new insights and require to be incorporated into models or frameworks of small firm internationalization. However, the cause and effect relationships are not yet totally clear. Indeed, it might be argued that networks provide mechanisms to overcome resource deficiencies, rather than being drivers of internationalization per se. Recognition that internationalization is affected by multiple influences has led 26
  5. 5. Bell et al.: Internationalization and Business Strategy to growing interest in contingency approaches. Such a view was articulated by Reid (1983), but did not attract much attention until recently. However, in the last decade Woodcock et al. (1994), Yeoh and Jeong (1995), Kumar and Subra- maniam (1997) – among others – have developed contingency frameworks in the international business and exporting fields. In justifying this perspective, Kumar and Subramaniam (1997) argue that the existing literature has not devoted much attention to evaluating market selection and mode of entry decisions as inter- dependent decisions. One might go even further and suggest that the range of the firms’ internationalization decisions, incorporating product decisions, market choice and entry modes, are made in a holistic way (a notion initially presented by Luostarinen, 1979). In a similar vein, Bell and Young (1998) and Coviello and McAuley (1999) have argued that excessive attention has been paid to the merits of competing theories and models rather than to their potential complementarities. The latter authors conclude that SME internationalization is best understood by integrat- ing major theoretical frameworks. Bell and Young (1998) contend that the nature and pace of internationalization is conditioned by product, industry and other external environmental variables, as well as by firm-specific factors. Indeed, firm- and industry-specific influences merit further investigation as particular ‘critical incidents’ may impact on firms’ overall business strategies and market focus. Firms may also experience ‘epochs’ of internationalization, followed by periods of consolidation or retrenchment, or they may be involved in particular ‘episodes’ that lead to rapid international expansion or de-inter- nationalization (Crick, 2002; Oesterle, 1997; Pauwels and Matthyssens, 1999). These ‘episodes’ or ‘epochs’ may be triggered by environmental forces that impact on the strategies of domestic or overseas customers and other network partners, as well as those that directly influence the focal firm. Business Strategy and Internationalization Melin (1992) has highlighted the limited attention that has been paid to the link between ‘internationalization theory’ and strategy issues at both conceptual and practical levels. The absence of linkages is perhaps most evident in relation to small firm strategies and internationalization. In some respects this situation is surprising, given that Ansoff (1965) identifies new market development (i.e. internationalization) as a viable strategy for rapid small firm growth in his product-market expansion matrix, as an alternative to developing new product/service offerings for the domestic market. However, in other respects the lack of attention is less remarkable and may be partially explained by a number of factors. First, much of the early literature characterizes small firms’ export behaviour as essentially unplanned and reactive, with firms responding to unsolicited orders or enquiries rather than pursuing proactive strategies (Bilkey and Tesar, 1977). Second, many of these contri- butions tend to regard international involvement as of secondary importance to domestic market activities and something that firms only consider once they have established a secure foothold in the home market. Thus, domestic and inter- national developments are often viewed as diverse strategic solitudes, rather than 27
  6. 6. International Small Business Journal 22(1) complementary strategies for firm growth. Third, the financial and human resource constraints of smaller firms are well documented, as is an absence of formal planning (Carson et al., 1995). This ‘resource poverty . . . requires some very different management approaches’ (Welsh and White, 1981), which often reflect the implicit, rather than explicit, nature of the process in small firms (Pennings, 1985). In these circumstances, small firm internationalization is often considered to be ad hoc and export activity regarded as ‘at best . . . unplanned, reactive and opportunistic’ (Bradley and Mitchell, 1986; Westhead et al., 2002). Nevertheless, Mintzberg (1973) and others (Timmons, 1978; Gibbs and Scott, 1985; Shuman and Seeger, 1986) observe that a major factor in the continued success and expansion of small firms is the strategic planning activity undertaken by CEOs and that strategy formulation is essentially a ‘top-down’ process. In this context, it should be recognized that the absence of an explicit and formal strategy does not equate to the lack of a strategic vision, whether or not this involves a global focus. It is suggested that strategic planning activity will become more formal and sophisticated over the life cycle of the business. However, in this context, some work indicates that the motivation to think and act strategically may only be brought about by a crisis within the organization (Aram and Cowan, 1990). Other research shows that the ability to use strategic management practices appropriately is a function of the entrepreneur’s previous experience (Bracker et al., 1988); and of contact with external advisors or non- executive directors (Berry, 1998). The latter two studies related to small firms in growth/small high-tech sectors, and are thus significant in the context of the present work on ‘knowledge-intensive’ versus ‘traditional’ firms. Related work also concerns the influence of management buy-outs (MBOs): a review of studies in the USA, France and the Netherlands (Wright et al., 1992) indicated that short- and medium-term improvements in performance and strategic focus, at least, were closely associated with the incentives of MBOs. More recently, Welch and Welch (1996) have attempted to develop a longi- tudinal conceptual model to identify the interrelationships between the two streams of international business inquiry, that is, internationalization and strategic management. The authors stress the significance of the ‘strategic foundations’ (knowledge, skills and experience, networks, etc.) of the enterprise and its external environment, and identify planned and unplanned routes to interna- tionalization, with networking important in both. They conclude by calling for ‘empirical studies that specifically focus on strategy and internationalisation process interconnections’ (Welch and Welch, 1996: 25). Andersen and Kheam (1998) used a resource-based framework to explore the international growth strategies of small- to medium-sized Norwegian exporting firms. Ansoff’s (1965) product-market expansion matrix is used to classify alternative growth strategies vis-a-vis market penetration, market development, product development, and diversification growth. Julien et al. (1997) also proposed a typology of the strategic export behaviour of SMEs based on their case study research. In addition, the importance of the wider business strategy context in internationalization is implicit in a number of other studies (Melin, 1992; Préfontaine and Bourgalt, 2002). For example, Coviello and Munro (1997) 28
  7. 7. Bell et al.: Internationalization and Business Strategy identify issues such as product diversification and acquisition as influences in international development. Additionally, Bell’s (1995) study showed examples of software companies that followed clients into international markets or sought to be acquired in order to sustain domestic and principally international growth. The increasing interest in ‘born global’ firms is important in this context too, since for such companies the key business strategy of the firm is rapid and dedi- cated internationalization. This phenomenon suggests that many firms no longer regard international markets as ‘simple adjuncts to the domestic market’ (McKinsey & Co., 1993), but that business strategies are developed from the outset with global markets in mind. Boter and Holmquist (1996) compared cases of traditional manufacturing (engineering) firms with innovation-oriented small firms. The former were integrated into the manufacturing systems of large companies, subcontractors and customers; operated with a production-oriented culture; had a local rather than global focus; pursued a stepwise international expansion; and were often family-owned. The latter were much more dynamic, independent, globally focused firms that internationalized rapidly, with a lower orientation towards the domestic market. Thus, extant research suggests that a greater understanding of both the domestic and international behaviour of smaller firms is still required. Moreover, critical interrelationships between domestic and export activities also need to be explored within the context of the firms’ overall business strategies. The present study seeks to address this lacuna and provide additional research and public policy support perspectives on these linkages. The specific objective of the enquiry was to explore the interrelationships between overall business strategy and internationalization. A number of key issues were empirically investigated in depth. These included: • firms’ initial business strategies, growth objectives and international orien- tation; • the stimuli which influenced the choice of strategies and subsequent oper- ational decisions; and, • the role of internationalization in the overall business strategy of the firms. Research Focus and Method The research adopted a case study approach involving 30 in-depth semi-struc- tured interviews with Chief Executive Officers (CEOs) or export managers of small-to-medium sized internationalizing UK companies. A sample of five ‘knowledge-intensive’ and five ‘traditional’ manufacturing firms was selected for investigation in each of three locations (England, Scotland and Northern Ireland).2 The research objective and decisions relating to the choice of method, sample selection, data collection procedures and analysis are elaborated upon hereafter. As previously indicated, the study adopted Coviello’s (1994: 17) classification of ‘knowledge-intensive’ firms as those ‘having a high added value of scientific knowledge embedded in both product and process. Often, this knowledge is also 29
  8. 8. International Small Business Journal 22(1) required in sales and marketing functions’. Although this term has mainly been applied to ICT firms (often, in the computer software sector), the definition was extended to include other manufacturing companies in recognition of the growing technological sophistication of firms in other industry sectors. For example, many firms in the printing industry, which were once very traditional, now use the latest computer technology in design and production and often distribute products by electronic means. Similarly, some clothing and textile firms are now producing garments using new fabrics that have a very high technological content and frequently employ computer aided design (CAD) and/or computer aided manufacturing (CAM) processes. Among ‘traditional’ manufacturing firms, such as electrical/mechanical engineering or furniture manufacturing, the technological content of products need not necessarily be high, although some quite sophisticated ‘knowledge-intensive’ processes may often be involved, for example packaging in the food and drink industries. As already indicated, the main objective was to explore the interrelationships between business strategy and internationalization. In addressing this objective, the research design attempted to avoid what Kamath et al. (1987) refer to as a ‘dominant use of logical-empiricist methodology’, which has ‘bedevilled’ inter- national research. Instead, a qualitative in-depth interview approach was adopted in order to seek richer and deeper insights into the complex phenomena under investigation and to attempt to answer and explain ‘why’ and ‘how’ type research questions (Easterby-Smith et al., 1994; Eisenhardt, 1989; Yin, 1989). The approach selected is consistent with a growing trend towards qualitative methods in empirical enquiries at the marketing/entrepreneurship/international- ization interfaces (Carson and Coviello, 1996; Coviello and Munro, 1997; Julien et al., 1997). These are also increasingly prevalent in industrial network research, which has a strong business internationalization focus (Axelsson and Johanson, 1992; Melin, 1992). Indeed, Easton’s (1995) robust epistemological defence concludes that they ‘are a powerful research method and one particularly suited to the study of industrial networks’. Another persuasive argument for adopting such approaches in small business research is that it may be the only way of obtaining information from the key decision makers, given their noted reluctance to complete questionnaires. Moreover, a typical lack of published information (in the form of shareholder reports, commercial analyses, etc.), poor recording of internal data and a marked reluctance of small business managers to divulge commercially sensitive infor- mation also make other forms of enquiry particularly problematic (Carson et al., 1995). Given the preceding considerations, the nature of enquiry, the size of the target firms and evidence in the extant literature of network influences on inter- nationalization, in-depth interviews were considered to be the most appropriate means of exploring the phenomena under investigation. In selecting firms, the approach taken was consistent with that of Eisenhardt (1989) who suggested that ‘random selection (of cases) is neither necessary or preferable’. Indeed, she further asserts that ‘extreme examples’ are most appro- priate when seeking to extend theory. The recent literature provides compelling evidence of differences in the internationalization strategies of ‘traditional’ and 30
  9. 9. Bell et al.: Internationalization and Business Strategy ‘knowledge-intensive’ firms (McKinsey & Co., 1993; Oviatt and McDougall, 1994). Consequently, these categories were chosen as the ‘extremes’ and groups of small manufacturing firms from each were selected for the purposes of further investigation and comparison. The ‘knowledge-intensive’ group consisted mainly of electronics and infor- mation technology firms, while the ‘traditional’ group was made up mostly of engineering, food and textiles firms (see Table 1 for selected characteristics of the firms). In all other respects, an attempt was made to match groups of firms at each location. The basic selection criteria were that firms should: • be current exporters (a minimum export ratio or sales turnover was not specified in order to obtain a sample of firms exhibiting various degrees of export involvement); • employ less than 250 staff (in line with the UK government’s criteria for defining SMEs);3 and, • be independent and indigenous (i.e. not subsidiaries of larger domestic or international companies, to avoid potential resource and cultural influences on decision-making). The sampling frame was constructed using various regional/national SME databases and directories of firms known to have an export involvement (such as Scottish Enterprise and Northern Ireland Local Enterprise Development direc- tories). In addition, other published information available on the firms (press reports, trade association listings, etc.) and the three researchers’ pre-existing knowledge of firms in their own locales was used in the selection of the final sample. As already indicated, information was collected via in-depth interviews with either CEOs or export executives (26 CEOs and 4 export executives, respec- tively). In all but one of these cases, where the firm had been re-established, these key decision makers had been involved in export development from the outset and played a pivotal role in internationalization decisions (a crucial factor identified by Miesenbock, 1988). Interviews lasting two to three hours were supplemented by company brochures or other materials provided by the firms. They were conducted in each location, using a pre-tested interview schedule (see Appendix 1) and a data collection template designed to ensure consistency between the researchers. The interview schedule contained a number of structured questions designed to gather data for classification purposes (firm size, age, export experience, export ratio, first export market/s, current market/s, etc.). Wherever possible, this information was triangulated with other on-line and secondary data sources. In addition, a series of open-ended questions were used to probe the strategic direc- tions of firms and explore underlying reasons for key internationalization decisions. These included questions on specific circumstances surrounding particular episodes (such as the first internationalization decision, subsequent market selection and entry decisions, etc.) and the rationale for why particular decisions had been taken. Particular events that resulted in a change or refocus- ing of business strategy were investigated in depth and the firm’s subsequent 31
  10. 10. International Small Business Journal 22(1) Table 1. Characteristics of the Sample Knowledge-intensive firms Traditional firms (n) (n) Period of establishment Less than 10 years 3 3 10–20 years 9 8 More than 20 years 3 4 Size of firm (turnover in £m) Up to 1 2 3 1.0–1.9 3 5 2.0–4.9 9 4 More than 5.0 1 3 Export experience Less than 5 years 5 2 5–10 years 6 7 More than 10 years 4 6 Export initiation Less than 2 years after start-up 3 3 2–5 years after start-up 4 3 5–10 years after start-up 3 3 Over 10 years after start-up 5 6 Export ratio (% of turnover) Less than 20 4 4 20–49 2 8 50–69 5 2 Over 70 4 1 strategic directions were explored. These facilitated a wide-ranging discussion of business and internationalization strategies in a manner that enabled respon- dents to provide their own account of the way in which such strategies had unfolded. Structured questions were analysed manually to obtain a profile of partici- pating firms and compare the characteristics of the two groups. Thereafter, quali- tative techniques were used to systematically analyse open-ended questions, undertake a thematic analysis and identify the patterns of response between groups. As can be seen in Table 1, the knowledge-intensive group and the traditional group were very compatible by age and turnover. However, while traditional firms tended to have slightly longer export experience, knowledge-intensive firms had generally higher export ratios (see also Table 2). These variations suggest differences in the pace of internationalization between the two groups. No observable differences were found to exist between firms in particular regions; nevertheless, generalizations should not be made due to the relatively small sample size and their non-random selection. In order to facilitate further discussion of the themes emerging from the research, background information on each of the case study firms, including brief details on age, size, products, markets and export involvement, is contained in 32
  11. 11. Bell et al.: Internationalization and Business Strategy Table 2. Company examples are used to illustrate and support the results, which are presented hereafter. Findings The research revealed a number of important general findings in each of the broad areas of business strategy and internationalization being investigated, but also identified a number of interesting differences in response between ‘know- ledge-intensive’ and ‘traditional firms’. Each of these areas is more fully elabor- ated upon in turn. The Firms’ Initial Business Strategy, Growth Objectives and International Orientation A number of factors appeared to exert a significant influence on initial business strategies, growth objectives and international orientation of all firms. First, ownership and management issues strongly influenced firms’ business strategies and international focus; second, product and market development strategies were closely linked; and third, the introduction of new process technologies often forced firms to revise their strategic directions. However, in terms of patterns and pace of internationalization ‘knowledge-intensive’ and ‘traditional’ firms res- ponded differently, with the latter being less aggressive in their growth strategies and more cautious in internationalizing. Ownership and Strategic Direction There was evidence of an association between the policy established for the business, overall company development and international focus. For example, nine firms had undergone changes of ownership or management since their establishment, mainly through MBOs but also due to mergers, acquisitions or insolvency (cases K1, T2, K6, T5, K9, K11, T10, T11, T14). Often, these changes led to a reappraisal of business strategies and/or a refocusing of business activi- ties, part of which included internationalization. Indeed, these episodes often appear to be a defining point in the development of the firm. As one respondent observed: we were going nowhere internationally, or as a firm, until the current management team bought the firm out. (CEO, case K1) Both ‘knowledge-intensive’ and ‘traditional’ firms were affected. In the former, MBOs were often linked to venture capital funding and/or financial support from regional development agencies. The injection of financial resources facilitated a strategy of acquisition-based growth for some firms: perhaps even more import- ant was the director-level expertise the funding agencies brought in areas such as financial management skills and the disciplines of strategic planning, forecasting and budgeting. As another CEO commented: the injection of cash was important to us, but it was really the expertise and skill that they [investors] brought that gave us a great push. (CEO, case K9) 33
  12. 12. 34 International Small Business Journal 22(1) Table 2. Basic Characteristics of Case Firms Year No. of Turnover Products First Export Top Export Markets Established Employees (£ m) Export Ratio (%) Knowledge-intensive Company K1 1983 48 3.0 Card-operated electronic 1987 70 USA, Netherlands, Australia systems K2 1987 40 1.5 Electric transformers 1987 70 Netherlands, Eire K3a 1976 75 3.5 Printing 1986 10 Hong Kong, Sri Lanka K4 1984 62 2.0 Ventilation equipment 1992 11 Eire, Netherlands, USA/Canada K5 1980 50 3.0 Electronic temperature 1994 25 France, Eire, Sweden controllers & sensors K6b 1980 35 3.0 Audio equipment 1993 50 Thailand, Malaysia, Kenya K7 1983 7 0.25 Industrial calibration 1989 40 S. Africa, France, India K8 1987 31 3.0 Electronic noise and vibration 1987 70 USA, Korea, Australia analysis instruments K9c 1983 20 1.0 Telecom equipment 1994 50 USA/Canada, Japan, Germany K10 1979 15 0.6 Electrical machinery 1984 50 USA, Canada, Saudi Arabia K11 1986 23 2.5 Underwater remotely operated 1990 55 Norway, Singapore, Brazil vehicles K12 1992 10 0.5 Industrial electronics 1992 60 Canada, Germany K13d 1938 150 11.0 Printing/communications 1982 1–2 _ K14 1982 45 4.2 Beverage dispensing equipment 1986 80 Italy, Spain, Benelux K15e 1972 80 1.0 Chemical plant contractor 1989 8 Canada, Saudi Arabia
  13. 13. Table 2. Continued Year No. of Turnover Products First Export Top Export Markets Established Employees (£ m) Export Ratio (%) Knowledge-intensive Company T1 1977 46 1.7 Varied giftware 1979 75 Australia, USA T2f 1979/1995 21 1.8 Beer 1990 3 Canada, USA, Spain T3 1972 30 1.3 Household textiles 1974 20 Eire, Netherlands, Australia Bell et al.: Internationalization and Business Strategy T4 1975 150 1.0 Shoe components/industrial tapes 1992 55 India, Canada, Hong Kong T5g 1961/1995 6 0.3 Machine and hand loom carpets 1966 40 Switzerland, Austria, Norway T6 1983 100 4.8 Part-bake bread 1985 40 Eire, Portugal, Egypt T7 1986 14 0.6 Confectionery 1991 20 Australia, Germany, Denmark T8 1986 70 2.1 Equipment/furniture for disabled 1989 30 Germany, USA, Netherlands T9 1972 50 4.0 Pet food 1980 25 Eire T10h 1994 25 1.2 Marmalades, jams 1994 30 Denmark, USA, Canada T11j 1892/1983 35 5.0 Processed fish 1991 63 France, Germany, Netherlands T12k 1980 150 8.0 Socks 1980 15 Sweden, USA, Norway T13 1972 6 >0.5 Assorted novelties 1991 10 Germany, Belgium, Netherlands T14 1990 150 6.0 Yarn 1990 18 Eire, Sweden, Germany T15 1983 150 4.5 Food containers 1990 20 Eire, Cyprus, France Notes: aFirms operating in an industry traditionally perceived as traditional, but with knowledge-intensive products and processes; bMBO in 1985; cMBO in 1993; dMBO in 1990; eThis is a service oriented firm, but gets involved with technical products via its sister company; fCompany went into liquidation in 1995 but was purchased shortly afterwards; gCompany went into receivership in 1994 and was purchased from receivers in 1995; hMBO in 1994; jCompany in decline and had plans to go into liquidation, and so 1983 was effectively a relaunch year for this family-owned business; kMBO in 1990. 35
  14. 14. International Small Business Journal 22(1) Typically, ownership and/or management changes led to a revitalization and reorientation of business activities including, in some cases, rapid and dedicated internationalization among what might be described as ‘born-again’ global firms. In comparison, there was evidence that ‘traditional’ firms (including some family- owned ones) tended to be generally less aggressive than others in pursuing growth strategies and also appeared to be rather more reluctant to internation- alize (cases T3, T9, T11 and T14). Fear of losing control of the business through any involvement by outside investors and the loss of ‘lifestyle’ benefits were among the factors that limited growth, whether at home or abroad. In both groups there were some examples of firms that had been content to focus on the domestic market for a lengthy period, but that had then inter- nationalized quite aggressively. The motivation for such behaviour often appeared to reflect a response to a ‘critical’ incident or event that triggered a subsequent chain of events. As one CEO stated: we were more than happy just to get company X’s business in the UK, but it was really when they recommended us to an affiliate that exports really took off. Since then we have had numerous referrals to other overseas associates. (CEO, case K1) Product/Market Strategies With respect to the components of business strategy, there were close inter- relationships identified between product and market strategies in the evolution of firms, regardless of whether they had adopted a domestic or international focus. In numerous cases, new product development was an essential prerequi- site to internationalization. For example, among ‘knowledge-intensive’ firms, case K5 had introduced three distinct electronic control products/services since its establishment; but it was not until the second of these was launched (which the company ‘hoped would be an “international” product’) that international business was feasible. This product was largely marketed in Europe where the Sales Manager at the time had contacts and knew the market; whereas a third product, targeted at the computer industry, was launched in the USA. Another company, case K11, focused upon the global oil and gas industry after its MBO in 1990. It entered into a series of related acquisitions to widen its product range and strengthen its market position internationally. These acquisitions had a positive impact on distribution structures and strategies in overseas markets as well. Among ‘traditional’ firms, adaptation of existing products for new markets was much more the norm. The product range was also a critical factor in both business expansion and retrenchment. For example, case K7, which had an advanced electronics-based industrial calibration product at the time of launch, found itself overtaken by lower priced, higher specified offerings from competitors and international sales dwindled away. Similarly, competition from low-cost economies to supply a basic, albeit design-intensive, product led to the decline of case T5, which produced machine and hand loom carpets. In contrast, the rapid international expansion experienced by cases K1, K6 and K9 can be clearly traced to a very strong commitment to product innovation and the development and commercialization 36
  15. 15. Bell et al.: Internationalization and Business Strategy of ‘state of the art’ electronic systems. In the case of K6, an audio equipment manufacturer, these interrelationships are shown very clearly in the CEO’s analysis of major issues for the firm’s development. In summary these included: • the development of ‘leading edge’ products to enable the company to expand from its existing markets into new countries and regions; • related diversification into systems that can be incorporated into other companies’ products; and, • the appointment and use of ‘associates’ in particular overseas markets to monitor developments, identify opportunities and maintain contacts with decision makers. Another CEO highlighted the interrelationship between product/market and overall business strategies: From day one I realised that the Irish market was too small and that the UK Market could not sustain us for long. So in designing the product, I needed to think about inter- national markets from the outset. (CEO, case K14) Operations Strategies Another emerging theme was the impact of process innovation on international orientation. In a number of cases the acquisition of new process technology had encouraged, or even required, companies to review and revise their strategic direction and market focus. In some cases this propelled firms into international markets, in others it merely accelerated the process. In the case of K14, a producer of beverage dispensing equipment, the development of a new manu- facturing process and the in-house design of production equipment by the owner/manager was central to the company’s domestic and international expan- sion. The decision to purchase ‘state of the art’ equipment by the management of K6 was driven by a desire to improve competitiveness in the home market. However, this investment could not be justified without an expansion into inter- national markets. Case T8, which manufactures equipment and furniture for the disabled, had also recently invested in new equipment to improve its domestic and international competitiveness. It was envisaged that this investment should enable the firm to exploit new market segments at home and abroad in the future. The CEO observed: we couldn’t have even begun to consider spending a fortune on this equipment without the French and German business. Sales in the UK market just would not have justified or supported this expenditure. However, the beauty of having this kit is that also makes us much more competitive in the home market and our quality control has risen too. (CEO, case T8) Business Strategy and Internationalization The small size of the UK market for ‘niche’ products provided a stronger impetus to internationalize among ‘knowledge-intensive’ firms. In many cases, firms’ offerings had been developed for international markets and management had a ‘global’ vision from the outset. In contrast, ‘traditional’ firms tended to have a 37
  16. 16. International Small Business Journal 22(1) domestic focus and overseas activity had often ‘evolved’ in a reactive manner due to unsolicited enquiries, or difficulties in the home market. Product Characteristics and Market Opportunities The background to internationalization and the motivating factors were quite diverse. Given the nature of the niche products and limited opportunities in the UK market, an international orientation was a fundamental component of business strategy for some firms from the outset. This was notably the case among many of the ‘knowledge-intensive’ firms (cases K1, K2, K8, K11, K12 and K14), although not all of them initiated overseas activities immediately. Cases K2 (an electrical transformer manufacturer) and K11 are particularly interesting, insofar as the UK market only became a target after more promising opportunities had been exploited abroad. In contrast, many ‘traditional’ firms tended to have a domestic market orientation at the outset (cases T2, T4, T7, T9, T11, T13) and only began to focus on international markets at a later date. Typically, this occurred when they were experiencing adverse trading conditions in the domestic market such as a decline in sales, a downturn in the economy or increased competition (cases T3, T4, T7). It was particularly interesting to note that in some cases (T2, T5, T11) it took a ‘near death’ experience to persuade firms to look to international markets. New Product Development Process Sector and product characteristics are probably the most significant factors in explaining proactive or reactive new market development approaches. The starting point for marketing strategy is the product offering and hence the new product development process (NPD) is critical. For many of the ‘knowledge- intensive’ firms, NPD was focused upon products that could be marketed inter- nationally. For example, cases K1, K6, K8, K9 and K11 sought to design new offerings suitable for key international markets, rather than for the domestic market. In contrast, the ‘traditional’ companies tended to design products for the home market first and then seek to adapt them for overseas markets in terms of product specifications, ingredients, labelling, etc. Thus, moves to international markets followed domestic activity. This was most notable among food sector firms in the study (cases T2, T6, T7, T9 and T11). Reactive Strategies Receipt of an unsolicited enquiry or order sometimes provided the initial impetus to internationalization. This was particularly true for many of the ‘traditional’ firms, (cases T2, T3, T4, T5, T7, T12, T13 and T14), but was also the trigger for some of the ‘knowledge-intensive’ companies (cases K10, K13 and K15). Never- theless, the latter were generally proactive in seeking out international oppor- tunities, tended to employ formal screening procedures and undertook more systematic research. 38
  17. 17. Bell et al.: Internationalization and Business Strategy Role of the Decision Maker The export development literature suggests that firms with greater exposure to the international environment, ranging from key decision makers having lived or worked abroad to experience of inward internationalization via imports etc., are more likely to be receptive to stimuli and outward business activities (see for example Aaby and Slater, 1989; Miesenbock, 1988; Reuber and Fisher, 1997). Within the sample, there were many instances where executives had prior international experience that had often been gained with previous employers. In one case, the recruitment of a sales manager with an extensive knowledge of European markets led to targeting of these markets. However, even when individuals had no such prior experience, their general knowledge and under- standing of industries in which they operated often created a high level of international awareness. This was most evident among the key decision makers of ‘knowledge-intensive’ firms operating in global industries such as electronics, oil or gas. Nevertheless, it was also apparent among some of the ‘traditional’ firms, especially the food and drink sector cases, where the UK’s membership of the European Union (and the impact of the Common Agricultural Policy) created a widespread awareness of international business. In addition, the major European food shows were widely known and supported throughout the industry. Initial Market Selection and Entry Strategies The market selection and entry strategies of ‘ knowledge-intensive’ firms were more likely to be influenced by relationships with clients and global industry trends, rather than by geographic or ‘psychological’ proximity of overseas markets. There was less evidence of network relationships among ‘traditional’ firms, some of which had gravitated towards ‘psychic’ markets. Exporting modes were prevalent in both groups as initial market entry strategies. In terms of country choice, internationalization ‘stage’ models focus upon ‘psychic distance’ as an important determinant of the initial market selection decision. However, the findings reveal that this was a determining factor in only a few cases and simply one of a series of contributory factors for several other firms. In contrast, other factors appeared to exert a fairly strong influence on country selection decisions. First, a significant number of ‘knowledge-intensive’ firms were influenced by global industry trends and gravitated towards ‘lead’ market/s in their particular field. Typically, the USA offered these firms the greatest prospects but other key markets included European, Scandinavian and Asian countries. For those elec- tronic and info-tech firms proactively seeking export markets, the USA was an obvious choice, but in some cases Asian markets were targeted after participation in a trade mission. A good example from a different industry is that of case K14, which manufactures dispensing equipment for soft drinks or beer that is used in fast food outlets and/or licensed premises. It initially targeted Benelux and Scandinavian countries for beer applications, as these were the home base of large players in the industry such as Carlsberg, Heineken and Stella Artois. They also targeted Australia to establish relationships with Fosters Brewery, which was 39
  18. 18. International Small Business Journal 22(1) itself internationalizing rapidly at the time. The USA, home of McDonald’s and other fast food giants, was the initial target for soft drink applications. Second, in some cases, ‘client followership’ was an important factor in the initial market selection decision. Existing contacts with UK clients sometimes led to export opportunities elsewhere. For example, case K1 signed deals with Xerox, Canon and Sharp in the UK, which led to new business abroad via UK clients’ international customer or dealer networks. Similarly, case K7 approached UK contacts and obtained permission to approach their overseas agents or distribu- tors; this led to receipt of a first export order from South Africa. There were also several cases where referrals by a client to a third party led to new export business. As will be discussed hereafter, client followership was also a prevalent influence on subsequent internationalization decisions as clients in the first export market often provided leads in other markets. Third, in at least two cases, decision makers’ pre-existing contacts gained from a prior employment, led directly to a first export order. Cases K2 and K12 both began exporting at start-up because the CEOs obtained orders from overseas clients of a firm they had worked in before. Case K2 also entered a subsequent export market in the same way. Together with client followership, this presents strong evidence of the influence of network connections on initial export decision and subsequent internationalization. Fourth, and peculiar to a number of Northern Ireland firms (cases T3, T6 and T9) was a decision to enter what is technically an export market (Republic of Ireland) rather than expand further in the UK. The decision was made because CEOs perceived the Irish marketplace to be less competitive than the UK, thus presenting greater opportunities for growth. In all of these cases, products were distributed via Irish retailers who had an established presence in Northern Ireland and were already clients of the firms. Thus, knowledge of the market and network connections were also contributory factors. In respect of choice of entry modes and methods of distribution in the initial export market, the vast majority of firms used agents or distributors, a few sold directly to end users and in a number of cases others sold directly to wholesale buyers or large retail multiples. Within the ‘knowledge-intensive’ sector, a number of firms were able to adopt their clients’ established distribution channels (for example cases K1 and K5). The tendency was to retain the original method of distribution to service the market. Nevertheless, there were instances where firms changed their initial distribution method at a fairly early stage, having recognized that the original choice was not appropriate for the circumstances. Subsequent Business Strategy and Internationalization Differences were observed in the evolution of business strategy and the processes, patterns and pace of internationalization of ‘knowledge-intensive’ and ‘traditional’ firms. The former expanded rapidly into a greater number of markets and tended to adopt a more proactive approach to internationalization. They were also more likely to change methods of distribution via licensing agree- ments, strategic alliances or establishing overseas facilities. ‘Traditional’ firms generally adopted a more incremental and reactive approach to international 40
  19. 19. Bell et al.: Internationalization and Business Strategy expansion. While ‘knowledge-intensive’ firms appeared to be developing new markets in a systematic manner based on established decision-making criteria, there was evidence that ‘traditional’ firms continued to react to new overseas opportunities in an ad hoc manner. Subsequent Pace and Patterns of Internationalization There were marked differences in the pace of internationalization between the groups. Many ‘knowledge-intensive’ firms had established a significant network of international distributors in a very short space of time. For example, case K1 currently has over 40 distributors worldwide; cases K8 and K14 both have more than 30 international distributors and cases K2, K5, K7 and K9 have agents or distributors in between 12 and 20 countries. In contrast, ‘traditional’ firms had, in the main, entered fewer overseas markets (typically, 5 or 6), over a longer period of time. In some cases, these latter firms had been quite aggressive in seeking overseas agents or distributors, but evidence suggests that this reflected a scattergun approach to international markets. In other cases, a degree of desperation to obtain urgently needed new business from any source appeared to be a major motivating factor. Targeting ‘lead’ markets, such as the USA, was a dominant feature in the internationalization patterns of ‘knowledge-intensive’ firms, whereas ‘traditional’ firms were more likely to continue entering geo- graphically or psychologically ‘close’ countries. Subsequent Market Entry Strategies An assumption in the literature is that companies have choices in the method of distribution/mode of entry (Anderson and Coughlan, 1987; Johanson and Vahlne, 1992; Benito and Welch, 1994). However, evidence suggests that these options were often limited to direct and indirect exporting at the outset, but that as firms developed and sought to gain more business, alternatives began to be considered. This was most apparent within the ‘knowledge-intensive’ group, where some of the firms had used alternative entry modes for particular markets. For example, case K8 signed a strategic alliance in the USA with Hewlett Packard, where the latter provided R&D funding in exchange for the rights to manufacture under licence in the USA. It also has a licensee in China and badge labelling deals in Japan and the USA. Case K12 entered into a joint venture with an overseas company. Case K14 has a licensing agreement with a US firm that manufactures and distributes the product throughout North America but estab- lished a joint venture in Australia. Cases K3 and K10 both established small-scale overseas production and marketing facilities. The management of case K11 recognized the need for direct representation in Russia and the USA, but could not afford a sales office. The solution was to employ market representatives who are paid a salary plus commission, but work from home to save office costs. Cases K6 and K9 both employ ‘associates’ in the Asia Pacific region that prospect markets, generate enquiries and offer some customer support. In contrast, among most of the ‘traditional’ firms, any changes in distribution tended to be at the agent/distributor/direct selling level, with firms choosing an appropriate method for a particular country. For example, case T2, a brewery, 41
  20. 20. International Small Business Journal 22(1) sells on a direct basis to an agent in Spain, but via a food and drink agency in Holland. Case T11, a fish processor, tends to sell to wholesale buyers in its target European markets, except Spain where it has three agents because of a very frag- mented market. However, none of the traditional firms had engaged in other distributive arrangements, or indicated their intention of doing so in the future. Subsequent Business Strategies It is evident from the preceding discussion that changes in strategic direction, in many cases linked to changes in ownership and/or management, had an influence on business strategies. The early decisions taken set in motion a subsequent series of events involving a variety of strategic areas of business. These changes were inevitably more important among the ‘knowledge-intensive’ firms given their rapid growth and internationalization. Within some of these firms, venture capital finance and an influx of expertise (and a trend to greater formality in planning and strategy) supported acquisition as well as organic growth. Such takeovers in turn provided additional human resources, including technical and marketing capabilities, assets and intellectual property rights, and new products catering for new market segments and requiring different distribution channels. In one ‘knowledge-intensive’ company (K8), which makes electronic noise and vibration analysis instruments, the aim was to supply a niche product to global markets, with a phased roll-out to Europe, USA and Asia-Pacific via agents and distributors. However, within 10 years of establishment it had become obvious that the strategy of global spread and growth required support by new products/services and/or new market segments if the company was to survive. It was also evident that new modes of market entry would need to be considered. At the time of interview, two acquisitions were pending in the UK and USA, the latter identified from continuing network relations. Outside equity interests were influential in this strategic redirection. Among traditional firms, strategic change tended to be slower-paced and more evolutionary in nature, once a decision on a particular strategic direction was taken. The critical decision was commonly to develop/launch a new product, sometimes requiring significant investment in factory and processing facilities or in new product development (e.g. T2 formed a consortium with three small brewers to redesign a beer bottle for their joint use). However, the influences on these product decisions were quite different. In T2, a new owner, who bought the firm from the receivers, initiated the NPD process. In another firm (T7), which had a history in ice-cream retailing and small-scale production, the new product opportunity came by chance. The company was approached by a local distillery to produce whisky-flavoured fudge for sale in its factory shop. This led T7 to launch a range of such products that virtually required the firm to go inter- national since the regional market was small and linked to tourism. In both of these cases a critical ‘event’ resulted in a fundamental strategic reorientation of the business. 42
  21. 21. Bell et al.: Internationalization and Business Strategy Environmental Functional Influences: Strategies: Internal firm resources decision-maker characteristics Finance management competencies Business Strategy Human Resources External favourable/unfavourable domestic market conditions Operations favourable/unfavourable international market conditions industry/sector trends Marketing globalization trends Organic growth Acquisition growth Products Markets Internationalization Notes: Formal relationships Network relationships Figure 1. Business Strategy and Internationalization Interrelationships Discussion The objective of this study was to explore the interrelationships between small firms’ overall business strategies and internationalization; and to make compari- sons between the strategic behaviour of ‘knowledge-intensive’ and ‘traditional’ firms. In this way it was aimed to identify new issues and perhaps to see the begin- nings of a new research agenda. The tentative evidence from this 30-company study is that there is much to be gained from this approach. Figure 1, derived from this exploratory research and supported by the extant literature, provides a diagrammatic representation of the interrelationships between business strategy and internationalization. Presentationally, this is complicated by the wide variety of interactions that may exist, but environmental factors appear to be particularly important in initial business development. These environmental influences are shown in the diagram as a form of continuum, since MBOs, for example, are a mixture of internal and external effects (when external equity is involved). It is evident from the current research (and many earlier studies) that network relationships are important in internationalization and these are represented in the diagram. In small firms particularly, there will be network influences in a range of areas of activity within and outside the firm. Many of the strategic influences and thrusts may be common in the early stages of corporate development. In particular, the reorientation of business activities 43
  22. 22. International Small Business Journal 22(1) as a result of ownership or managerial change (which was the initial driver for more active business development in many of the sample firms), plus new product development and process innovations, were of major significance. Earlier work (for example Berry, 1998; Bracker et al., 1988; Wright et al., 1992) has shown the importance of strategic management practices, of external advisors and directors, and of MBOs in redirecting and stimulating business development. This study has shown that such changes lead to international as well as domestic growth. Family ownership, by comparison, was linked to a more cautious and reluctant approach to internationalization. Although early growth was strongly influenced by internal and external environmental factors, as firms expand (especially using the acquisition route), complex interrelationships emerge which may both influence and be influenced by internationalization. There were also close relationships between the nature of product offerings and the development of both domestic and international market opportunities in the evolution of the sample firms. Furthermore, product and process innovation appeared to provide an important stimulus to overseas expansion. Generalizing from some of the ‘knowledge-intensive’ firms, the international- ization process may emanate from a statement of corporate strategy, especially where external parties are providing financial support. Typically this would encompass marketing objectives including internationalization. The outworking of such a strategy clearly has implications for the functional areas of business; and each of the latter may represent either barriers to growth (e.g. managerial deficiencies or capacity shortages) or stimuli (e.g. new management appoint- ments or tooling and design investment). The implementation of initial inter- nationalization strategies may thus see an iterative process of learning and gap filling in other areas, if functions such as human resources and operations are to support and reinforce the process. For companies expanding through acquisitions, however, a takeover may further influence the process, affecting internationalization directly and also indi- rectly through the impact on other business functions. In terms of direct effects, Case K11 provides an interesting illustration. The initial entry mode used by the company involved the establishment of distributors in a range of international markets as part of a ‘scattergun policy’ to tap small worldwide niche markets. However, three acquisitions introduced high-value products with significant customization requirements. As a consequence, the distribution emphasis changed from distributors only to a mix of distributors and direct selling (in the UK, USA and Russia). In the latter two markets a cost minimizing approach was pursued with the employment of salaried sales persons working from home. In respect of indirect effects, some of the features of the products from the acquisi- tions were dated (e.g. control electronics). Since the company did not have a significant in-house R&D capability, it sought a link with a German university to make a joint proposal to the European Commission for R&D support. While some of the findings of the present research indicate threads of commonality, others indicate some clear differences between the business strategies and internationalization processes of ‘knowledge-intensive’ and ‘traditional’ manufacturing firms. ‘Traditional’ firms followed a cautious, 44
  23. 23. Bell et al.: Internationalization and Business Strategy Table 3. Internationalization Strategies Knowledge-intensive Firms Traditional Firms Motivation Proactive Reactive Evidence of strategic thinking Adverse domestic market and planning conditions ‘Niche’ offerings/small home Unsolicited/enquiries orders market ‘Reluctant’ management International from inception Cost of new production Active search processes ‘force’ export ‘Committed’ management initiation Patterns Concurrent Incremental Near-simultaneous domestic Domestice expansion first and export expansion (In some cases exporting preceded any domestic market activity) Lead markets ‘Psychic’ markets Strong evidence of networks Limited evidence of networks Pace Rapid Gradual Fast internationalization Slow internationalization (large number of export (small number of export markets) markets) Many markets at once Single market at a time New product development of Adaptation of existing offering ‘global’ offerings Method of Flexible Conventional Distribution/Entry Use of agents or distributors, Use of agents/distributors or but also evidence of wholesalers integration with client’s Direct to customers channels, use of licensing, joint ventures, overseas production, etc. Subsequent Structured Ad hoc Internationalization Evidence of a planned Evidence of continued reactive approach to international behaviour to export expansion opportunities Expansion of networks Unrelated new customers incremental approach both domestically and internationally, influenced in part by the industry sectors in which they operated, as well as by managerial attitudes. Strategic thinking and planning was more strongly in evidence within the ‘know- ledge-intensive’ firms, commonly supported by external advisors and non- executive directors (and linked to external finance). Differences between the two groups were evident in levels of commitment to internationalization, the extent to which international strategies are planned, and regarding the methods and tactics employed. These differences are synthesized in Table 3. Among 45
  24. 24. International Small Business Journal 22(1) ‘knowledge-intensive’ manufacturing firms, findings include an international orientation from inception; a new product development process focusing upon the requirements of international markets; a gravitation towards lead markets in the particular industry sector; a planned and structured approach to overseas markets; rapid internationalization; and more variety in market servicing modes. These provide support for other recent work on the ‘born global’ phenomenon. In addition, there are marked similarities with findings emanating from recent research into knowledge-intensive service firms (Knight, 1999). This linkage is important as it recognizes that knowledge-intensity is not restricted to particular sectors or to service-intensive firms, but is increasingly important to many firms. Indeed, it can be argued that knowledge-intensity and the degree to which a firm possesses it, represents a significant competitive advantage for the firm in both domestic and international markets. Areas for Further Research Based on the findings emanating from the exploratory research undertaken in this study, future research could usefully focus on further investigation of a number of key issues (where the approach is similar to McDougall et al., 1994; Coviello and Munro, 1997). Namely: • What additional factors influence firms’ initial business strategies, and how do management and ownership factors interact with external environmental variables in business growth? • What are the critical strategic choices made by small firms in their early growth years, and to what extent are these strategic decisions interrelated? • What is the role of internationalization in the early growth of small firms, and in what ways do other strategic decisions interact with and impact upon the internationalization decision? • Does organic as compared with acquisition growth influence the balance between domestic and international expansion? • How does the firm’s ‘state’ of internationalization and its international growth proceed over time in comparison with its domestic growth? • What additional factors encourage firms to internationalize rapidly after a long period during which they have focused on the domestic market? The above questions derive from the results of the present exploratory investi- gation and now require further study. In the process of undertaking this further research, there is a need to re-examine extant internationalization models and frameworks. The results for ‘traditional’ firms in the sample tend to offer some support for ‘stages’ models of internationalization, but internal and external environmental influences are important too. For ‘knowledge-intensive’ firms, no single model seems to have sufficient explanatory power on its own, a conclusion which supports Coviello and McAuley (1999). Given the holistic perspective on small firms’ strategies and internationaliza- tion that is suggested here, the resource-based perspective may provide a useful framework to integrate competing conceptualizations (Bell et al., 1998). Its basic premise is that it is the firm’s ability to generate and build or leverage resources 46
  25. 25. Bell et al.: Internationalization and Business Strategy and competencies that is the key to competitive advantage and organizational survival (Barney, 1991; Grant, 1991; Wernerfelt, 1984). Small firms will respond differently in their efforts to overcome resource/competence deficiencies in areas such as finance and human resources, in both a domestic and international context. Such responses will also be ‘contingent’ on the levels of resources the firm has at its disposal (Reid, 1983; Woodcock et al., 1994; Yeoh and Jeong, 1995), particularly in respect to international expansion where risks are likely to be higher and the human, financial and knowledge resource requirements greater. Thus, the decision to internationalize incrementally or rapidly and whether to adopt atomistic or networked approaches are not only based on perceptions of opportunity, but also upon the resources the firm has at its disposal or can leverage from external sources. In an internationalization context, the mode of entry chosen will be that which facilitates a competitive position in the particular overseas market, subject to the constraints imposed by resource shortages of various types. It may be simply a mechanism by which to exploit the true competencies of the firm (e.g. unique products, brand names, market segmentation skills); or it may represent a competence in its own right. The resource-based perspective also assumes the coordinated deployment of assets and capabilities in creating, producing and marketing products. Technologies, product strategies, markets and marketing, and competitive environments are interdependent and form a positive feedback system. As with contingency approaches to internationalization, this argues against a consideration of country market choice or mode of entry as indepen- dent decisions. Moreover, particularly in knowledge-intensive sectors, a number of key markets may be pursued concurrently and a variety of entry strategies to these markets may need to be considered simultaneously. Implications for Public Policy in Support of Small Firm Internationalization The results have implications for policy makers charged with supporting the development of the small business sector. First, considerable policy enthusiasm is currently being directed in many countries towards developing a ‘knowledge economy’. Naturally, much of the focus is on new technologies (such as the infor- mation technology and biotechnology sectors); however, as indicated by the present research, knowledge-intensity is not restricted to these sectors, but is also infiltrating more traditional sectors. In consequence, policy makers should recog- nize that ‘knowledge-intensive’ firms may inhabit or be emerging in other (more traditional) sectors. Second, evidence indicates that ‘knowledge-intensive’ firms develop much more dynamically than their ‘traditional’ counterparts. In these circumstances, their support needs are much more immediate, with high levels of assistance most likely to be required from the outset. This applies to various aspects of govern- ment business policy in support of small ‘knowledge-intensive’ firms and in providing assistance to enable them to build or leverage their resource base. However, it is particularly important in respect to internationalization support programmes that have, traditionally, assumed an incremental approach to the 47
  26. 26. International Small Business Journal 22(1) process. If, as the evidence suggests, international and domestic expansion is virtually concurrent (or, if the former actually preceded the latter), then the design and delivery of such offerings must be fundamentally reconsidered. Moreover, given the interrelationship between business strategy and inter- nationalization, it may also be argued that such programmes should place a higher emphasis on management development and strategic issues rather than focusing solely on the international dimension. Consideration must also be given as to whether or not export support agencies should prioritize support for ‘knowledge-intensive’ sectors with greater growth potential, rather than more ‘traditional’ sectors whose long-term prospects may be rather limited domestically and internationally. Finally, public policy makers should recognize that supporting small firm internationalization involves much more than merely attempting to stimulate export activity. Measures to support inward technology transfer and help small firms to develop networks and supply- chain relationships with larger indigenous and international companies located in the home market must also be considered. Conclusion The findings presented in this comparison of the internationalization processes and patterns of ‘knowledge-intensive’ and ‘traditional’ small UK manufacturing firms suggest that some important differences exist in respect to overall business strategies and approaches to internationalization between these types of firms. They also indicate that strong linkages exist between market focus and strategic direction. In turn, these findings have implications for theory development in the field and public policy support for the small business sector, which are outlined and discussed. Notes 1. The literature commonly distinguishes corporate strategies, which concern vertical integration and diversification and relate to the scope and boundaries of a firm’s activi- ties, from business strategies. 2. Selection of UK locations was based on proximity of the authors’ home universities. As areas within the United Kingdom, there was no reason to expect different behaviour patterns by firms, except in the case of Northern Ireland, which borders the Republic of Ireland, a separate country. 3. A number of citations support this assertion both in government reports and in academic studies such as Crick (1997). It is, however, consistent with the small firm literature (see for example Storey, 1994). References Aaby, N. E. and Slater, S. F. (1989) ‘Management Influences on Export Performance: A Review of the Empirical Literature 1978–88’, International Marketing Review 6(4): 7–26. Acs, Z., Morck, M., Shaver, R. and Yeung, B. (1997) ‘The Internationalisation of Small 48
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