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Internationalization and SMEs:A Practitioner’s Perspective

Dr. Michael McDermott

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Structure of Talk

Part 1: • Introduction and Background

Part 2: • The Consultant’s Perspective on SME

Internationalization

Part 3: • Conclusions and Recommendations

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Part 1: Introduction and Background

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Internationalization: The Twin Academic Perspectives

Export Marketing

• Gradual process

• Overcoming barriers

• Confidence rises

International Entrepreneurship

• Rapid progress

• Fearless

• Ambitious

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Internationalization: The Policy Makers’ Perspective

Exporting

• Encouraged companies to seek export markets

• Success was often judged by more is best

International Entrepreneurship

• Aimed to accelerate the creation of ‘global companies’

• Success was often judged by less is best

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The ‘Challenges’ Facing SMEs

1. Seeking to commence exporting;

2. Seeking to identify priority markets;

3. Seeking to identify new markets to compensate for declining sales in traditional markets

4. Seeking to address specific problems in markets of high strategic importance;

5. ‘Born-Globals’

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1. SEEKING TO COMMENCE EXPORTING

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Why Begin Exporting?

• Consider domestic vs international market conditions

• Consider ‘push’ vs ‘pull’ factors

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The ‘Push’ Factors

• These relate to factors arising in the domestic market– internal vs external– positive vs negative

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The ‘Push’ Factors: Internal and External

Internal Factors• The company is the clear market leader, or at least has been very

successful in the domestic market, and questions its ability to enjoy historical growth levels domestically

• The company believes that there is no scope for sales domestically

• The company regards exporting as a ‘must-do’ activity

External Factors• The domestic market is small and/or shows no signs of growth

• The market is buoyant but the company is being squeezed out by rivals

• The company has been ‘found out’ by domestic customers, and its poor reputation precludes market success

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The ‘Push’ Factors: Positive and Negative

Positive Factors

• The company is the clear market leader, or at least has been very successful in the domestic market, and questions its ability to enjoy historical growth levels domestically

Negative Factors

• The company believes that there is no scope for sales domestically• The company regards exporting as a ‘trendy’ activity• The domestic market is small and/or shows no signs of growth• The market is buoyant but the company is being squeezed out by

rivals• The company has been ‘found out’ by domestic customers, and its

poor reputation precludes market success

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The ‘Push’ Factors: An Evaluation

DomesticProfile

Description Needs Support to…

‘Angel’ A rare breed. Possesses notable competitive advantage(s).

Support to venture overseas

‘Agnostic’ Very common. Has made no effort to learn about the market.

Research the domestic market and determine if there are viable opportunities

‘Atheist” Very common. Concludes without evidence that there is no viable market domestically

‘Lapsed” Very common. Knows what they should do, but unable to offer the commitment and consistency required for success

Identify less hostile markets overseas

‘Sinner” Very Common. Realizes own failings and seeks easier picking overseas

Resolve competitive weaknesses before repeating the same mistakes

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The Pull Factors

• Export markets are larger and/or are growing rapidly

• And the larger the market the more it is deemed a market of huge importance

• So we see that the company wants to enter the USA market because it is the largest in the world for that particular industry

• Or it is determined to export to China as it is the fastest growing export market

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The Pull Factors: An Evaluation

• The company is seduced by opportunity• There is blinkered optimism• An attractive market is a necessary but not

sufficient condition for market entry• Realism is required to evaluate company-

specific opportunities• Evaluate markets using a much broader range of

criteria • Smaller, or slower growing markets may actually

offer much better prospects

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2. SEEKING TO IDENTIFY PRIORITY MARKETS

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Classic Symptom of “Exportitis”

• How often do you read on the company website or in the corporate brochure that the company – an SME - has exported or continues to export to a large number of markets?

• Let’s say more than 20 export markets• This is a proud boast, and one that is well-received by

TPOs and the business media

But is the number of export markets served an indication of export success?

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Classic Symptom of “Exportitis”

• Turnover is small• Imagine the turnover is $10m• And 90 per cent of that comes from domestic

sales• So exports account for a total of $1.0m, and that

comes from at least 20 markets

Does that suggest robust and solid performance in export markets?

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Classic Symptom of “Exportitis”

• Of course not!• This does not suggest a company

successful penetrating many of its export markets

• Or clearly it’s picked export markets that have very limited potential

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“Exportitis”: The Harsh Realities

Often the reality is that our exporter to many markets faces two harsh realities:

• It is dependent upon a couple of export markets; and

• It exports to a very large number of countries every year

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“Exportitis”: The Medicine

• The company must be encouraged to reconsider its measures of success in export markets

• In most cases, ‘less is more’• Focus upon priority markets and allocate

resources and effort with discipline• For most SMEs, a narrow focus on a limited

number of export markets will lead to improved performance

Remember the aim is to penetrate markets not collect frequent flyer points

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3. SEEKING TO IDENTIFY NEW MARKETSTO COMPENSATE FOR DECLINING SALES IN TRADITIONAL MARKETS

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Key Questions facing the Company

• Where are these sales declining?– All key markets or just some?

• Why are these sales declining?– Due to external or internal issues, or both?

• When did they start declining?– Is this a temporary blip or an enduring trend?

• How can the company arrest this trend?– Is it time to revise its approach?

• How can the company avoid this happening in new markets?– Is change essential?

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Learn and Move On

• Sometimes the decline is a general trend, and recovery is not an immediate prospect

• However, this decline whilst a threat can also prove an opportunity

• Learn from previous experience• Sometimes the decline was exacerbated

by decisions that the company took in the past

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Potential Company Responses as it enters a new tranche of markets

The Ill-Advised Approach• Look to the past and seek to repeat the exact same approach that

once served the company well;• Denies itself the benefits of assessing areas for improvement• The result is that it’s almost guaranteeing poor performance in these

markets in the future

The Sensible Approach• Consider the present and emerging trends, and make the necessary

adjustments• Indeed, this is an opportunity to apply previous learning experiences

and make better-informed, wiser decisions

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4. SEEKING TO ADDRESS SPECIFIC PROBLEMS IN MARKETS OF HIGH STRATEGIC IMPORTANCE

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Unraveling Past Mistakes

• Often weak performance in markets is due to the company’s past decisions

• For example, the company may focus its efforts on products that are very successful in other markets, rather than those best-suited to the market

• Perhaps the most common error arises in terms of distribution policy:– Distributors are appointed when they are not required – direct

relationships would be better– The company appoints distributors without proper consideration

of their suitability– It is much too generous providing exclusivity for too long and in

too large a market, and fails to insist upon performance targets– Refusing to recognize that the market is evolving and new

distribution channels supersede traditional channels

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5. SEEKING TO GLOBALIZE RAPIDLY:THE ‘BORN-GLOBAL’

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‘Born Global’Company

TraitsCommon Company

AttitudesCommon Issues

Technology-based

This is world-class technology.

Are obsessed with technology, and not market needs;Unaware of competing alternatives.

Very early stages of development

Let’s be as secretive as possible.

Deny themselves opportunities to collaborate with complimentary partners;Lose valuable time in speed to market.

Competes for Venture capital

‘They just don’t get it’.

Cannot express the basic concept in plain language that communicates the value;Struggle to secure funding.

Competes in the market for its product/service

‘There is no competition’.

Invariably there is, and often more advanced;If there is none, perhaps for good reason.

Excessive confidence

We will select partners from global giants.

Expects global leaders to ‘buy-in’ when the concept is ill-defined and unproven;Face stream of constant rejection.

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6. GENERAL ISSUES

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Lack of Focus: The Critical Issue

• Companies do themselves a huge disservice• They often do not understand the nature of their

own business• They fail to recognize their:

– core competences– strongest product(s)/service(s)– Market segment with greatest potential due to buyer

preferences and nature of competition– International markets where the chances of success

are greatest

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Knowledge = Strategic Analysis

Courage = Strategic Choice

Discipline = Strategic Implementation

Becoming Focused

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Lack of Focus: The Causes and Results

• Most companies turn the recipe for focus on its head;

• They begin with Strategic Implementation, and then are bewildered when success is elusive;

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Strategic Implementation = Confusion

Strategic Choice = Panic

Strategic Analysis = Fire-fighting

Lack of Focus: The Causes and Results

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Thank You