Chapter 7 Small Business as Multinational Companies Overcoming

Learning Objectives • Understand the basic definitions of small business and entrepreneurship • Explain how small businesses can begin as global start-ups or follow the stages of internationalization • Understand how small businesses can overcome barriers to internationalization Copyright© 2007 South-Western/Thomson Learning All rights

Learning Objectives • Identify when a small business or entrepreneurs should consider going international • Understand how small businesses or entrepreneurs can find customers, partners, or distributors aboard • Understand how new venture wedge strategies can be used in foreign markets • Understand factors driving entrepreneurship Copyright© 2007 South-Western/Thomson Learning All rights

What Is a Small Business? • “Small” business – many definitions • UN: less than 500 employees • The popular press: less than 100 employees • U. S. small business administration has more complex definitions - Definition varies by industry, sales revenue, and the number of people Copyright© 2007 South-Western/Thomson Learning All rights

What Is a Small Business? • “Small” businesses - Over 98% businesses in Europe, N. America, and Japan - Employ more than 50% of local populations - Produce nearly 50% of the countries’ GNPs - Create more than 2/3 of new jobs Copyright© 2007 South-Western/Thomson Learning All rights

Internationalization and the Small Business • Two models - Small business stage model: process of following incremental stages of internationalization - Global start-up or Born-global firm: company that begins as a multinational company Copyright© 2007 South-Western/Thomson Learning All rights

Small Business Stage Model: Six Stages • Stage 1: Passive exporting - Company fills international orders but does not seek export business • Stage 2: Export management - Specifically seeking exports—usually rely on indirect exporting • Stage 3. Export department - Significant resources dedicated to seek increased sales from exports • Copyright© 2007 South-Western/Thomson Learning All rights

Small Business Stage Model • Stage 4: Sales branches - High demand justifies setting up local sales office • Stage 5: Production abroad - Use licensing, joint ventures of direct investment - Difficult stage because of the risk of failure • Stage 6: The transnational - Develop global integrated network Copyright© 2007 South-Western/Thomson Learning All rights

Small Business Global Startup or Born-Global Firms • Key elements favoring global start-ups - Dispersed human resources - International sources of venture capital - The existence of a global demand - The lack of a geographically protected market - The necessity of worldwide sales to support the venture - The potential to avoid later resistance to internationalization Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 1: Major Differences on Key Aspects of The Traditional Internationalization Stages between

Small Business E-Commerce • Web sites offer a rapid way to go international • Web site configured for e-commerce is low cost • Quick way to sell across national borders Copyright© 2007 South-Western/Thomson Learning All rights

Advantages of Small-Business E-Commerce • Ability of small firms to compete with other companies • Creates the possibility and opportunity for more diverse people to start a business • Convenient and easy way of doing business • Low cost to compete • Makes domestic products available in other countries • Utilize the Internet have higher revenues Copyright© 2007 South-Western/Thomson Learning All rights

Challenges of Small-Business E-Commerce • • Managing upgrades Language barriers Shipping and returns Assuring security for a Web site Fraudulent activities online Receiving international payments Costs required to maintain the site Finding and retraining qualified employees Copyright© 2007 South-Western/Thomson Learning All rights

Overcoming Small-Business Barriers to Internationalization • Liabilities of newness: a large percentage of new businesses fail within a year • Liabilities of size: lack of scale to produce goods or services as efficiently as larger companies Copyright© 2007 South-Western/Thomson Learning All rights

Overcoming Small-Business Barriers to Internationalization • Managers’ limited international experience • Managers’ negative attitudes - Belief that venture too risky and not profitable - Competition seen as domestic - Ignoring of international opportunities Copyright© 2007 South-Western/Thomson Learning All rights

Developing a Small-Business Global Culture • Global culture: managerial and worker values that view strategic opportunities as global and not just domestic • Framework to understand international operations Copyright© 2007 South-Western/Thomson Learning All rights

Small-Business Global Culture • Characteristics of decision makers affecting development of a global culture - Perceived psychic distance to foreign markets - International experience - Risk aversion - Overall attitudes toward international strategies Copyright© 2007 South-Western/Thomson Learning All rights

Developing a Small-Business Global Culture • Changing attitudes of key decision makers - Being close in culture and geography - Overcome skepticism regarding the international markets - Positive attitudes more necessary for global start-ups Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 2: Attitudinal Differences Concerning Internationalization Copyright© 2007 South-Western/Thomson Learning All rights

Duties and the Personal Life of the Small-Business CEO • For small firm, opening new markets is CEO’s responsibility. • CEO must bear social and business costs - Increased travel and stress from undertaking a new venture - Can adversely affect family life - Takes away from the daily management Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 3: Training and Knowledge Needs of Small Firm CEOs Entering Internationalization Copyright©

Size and Small Business Internationalization • Size barrier to internationalization - Larger firms have more resources to support international operations • Size is an issue only in the internationalization decision, however. • Eventually, international sales intensity of small firms exceed that of big firms. - International sales intensity: amount of international sales divided by total sales of the company Copyright© 2007 South-Western/Thomson Learning All rights

Small Business Advantage • Speed becomes the small business advantage - Faster innovation - Can change products and internal operations faster - Speed can overcome size disadvantages - Larger firms must often overcome bureaucratic procedures Copyright© 2007 South-Western/Thomson Learning All rights

The Future: Falling Barriers for Small Businesses • Barriers are becoming easier to overcome • Government support programs for small businesses are increasing • Trade agreements are making trade easier • Increase in small businesses engaged in international operations also makes it easier Copyright© 2007 South-Western/Thomson Learning All rights

When Should a Small Business Go International? • If the following questions are answered positively, small business is ready. - Do we have a global product or service? - Do we have the managerial, organizational, and financial resources to internationalize? - Is there willingness to commit resources to face the risks of internationalization? - Is there a country in which the company feels comfortable doing business? Copyright© 2007 South-Western/Thomson Learning All rights

When Should a Small Business Go International? (cont. ) - Is there a profitable market for product or service? - Which country should be entered? - Do we have a unique product/service that is not easily copied by multinationals or local entrepreneurs? - Do location advantages exist upstream in the value chain? - Can we afford not to be a multinational? Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 4: Questions to Consider in the Small Business Decision to Go International

Exhibit 7. 5 Steps in Picking a Foreign Market Copyright© 2007 South-Western/Thomson Learning All

Getting Connected to the International Market • Participation strategies - Same participation options as larger firms - Exporting, licensing, joint ventures, and foreign direct investment - Most small businesses often emphasize exporting Copyright© 2007 South-Western/Thomson Learning All rights

Finding Customers and Partners: Customer Contact Techniques • Trade shows • Catalog expositions • International advertising agencies and consulting firms • Government-sponsored trade missions • Direct contact Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 6: Selected U. S. Government Programs for Making International Contacts Copyright© 2007

Exhibit 7. 7: International Trade Leads: A Web Sampler Copyright© 2007 South-Western/Thomson Learning All

Ready to Go and Connected: A Synopsis • Finding the right overseas partner: the most important step • Find a good wedge to break into a new market Copyright© 2007 South-Western/Thomson Learning All rights

New-Venture Strategies for Small Multinational Companies • Entry wedge: company’s competitive advantages for breaking into the established pattern of commercial activity Copyright© 2007 South-Western/Thomson Learning All rights

New Product or Service and First-Mover Advantage • Being the first to introduce a product or service - Must be innovative - Must be comprehensive • Must meet customer expectations in areas such as warranty and expected components • Technological leadership—most common source Copyright© 2007 South-Western/Thomson Learning All rights

New Product or Service and First-Mover Advantage • Have firsts access to natural and social resources - Can choose the best locations • Can have the best access to social relationships - Lead to the personal contacts to build effective channels of distribution - Lead to trust and commitment from business partners and customers Copyright© 2007 South-Western/Thomson Learning All rights

New Product or Service and First-Mover Advantage • Switching costs: occur when customers face some loss in turning to a competitor’s products - because of brand loyalty, many customers may not want to face the discomfort of switching to another brand of a product or service Copyright© 2007 South-Western/Thomson Learning All rights

Copycat Business • Copycat Business - The “me too” strategy - Adopt existing products or services - Find a niche or slight innovation to attract customers Copyright© 2007 South-Western/Thomson Learning All rights

Successful Copycat Moves • • Be the first to a new standard Go after the toughest customers Play to different customer needs Transfer the location Become a dedicated supplier or distributor Seek abandoned or ignored markets Acquire existing business Copyright© 2007 South-Western/Thomson Learning All rights

International Entrepreneurship • Entrepreneur: person who creates new ventures that seek profit and growth - Faces risks and uncertainty of new and untested business • New ventures: entering a new market - Offer a new product or services - Introduce a new method technology or innovative use of raw materials Copyright© 2007 South-Western/Thomson Learning All rights

International Entrepreneurship • International Entrepreneurship: refers to the “discovery, evaluation and exploitation of market opportunities. ” Copyright© 2007 South-Western/Thomson Learning All rights

Why is International Entrepreneurship important? • Most experts consider entrepreneurship the driving force of all small businesses • If we want to get a complete understanding of small businesses in any nation, we need to examine the level of entrepreneurship in that country • Entrepreneurship is also seen as the driver of innovation and economic development for any nation • Entrepreneurship not only creates new job Copyright© 2007 South-Western/Thomson Learning All rights

International Entrepreneurship and Small Businesses • Many multinational firms rely on entrepreneurs and small businesses to do business when entering a new country • Small businesses can play an important role in assisting existing multinational companies in developing or offering new products that can improve productivity Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 7. 8: Entrepreneurial Activity Ratings by Country Copyright© 2007 South-Western/Thomson Learning All rights

Conclusion • Small businesses are important aspects of economies of all nations • Small businesses provide jobs, economic growth and innovation • Chapter provides crucial background information on small businesses • Chapter also discusses international entrepreneurship Copyright© 2007 South-Western/Thomson Learning All rights