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An online monthly research publication by the Ivey Business School
Volume 14, Number 1: Supplement
January 2008
Internationalization
of Small and Medium Sized Companies
Click here to download audio/visual
presentation.
Click here
to listen to the Q&A.
For small and
medium sized companies, embracing growth often
means forging into unknown international
markets. In the past, uncertain environments
were seen as impeding organizational growth and
performance, but recent research suggests that
uncertainty can actually act as driver of
growth.
Michael Rouse, a Professor of Strategy and
Organization at the Richard Ivey School of
Business recently completed a study on the
internationalization of small and medium sized
companies. Ashleigh Murphy spoke with him to
discuss internationalization, drivers and
impeders of growth, and some of the complexities
of operating in international markets.
Ashleigh began by asking him why companies
expand internationally…
A. Basically they internationalize
looking for opportunities for growth. So
companies are looking to leverage their
competencies across multiple markets often
times, and market size can be a big issue. So,
for example, if a company is exploiting a niche
market that may mean that economies of scale
require larger markets and the only place to
find those larger markets might be to
internationalize, to go globally.
A good example of that would be, I guess in an
extreme case, a biotech or a pharmaceutical
company that is developing a cure for a rare
disease. Now in extreme cases, there can only be
three-or-four-hundred cases of that disease in
Canada for example. So the only way that you can
afford to invest the millions of dollars it
takes to bring a drug through clinical trials is
to have a market –a world wide market –for the
product once it’s done. You have to have, often,
some kind of global reach in order to get market
size.
Q. Why is it important to understand the
internationalization of small firms?
A. Small firms are the drivers of the
economy. A recent OECD policy brief for example,
stated that small and medium sized companies,
the SMEs, the kinds of things that Elaine
Ramsey, Patrick Ibbotson, and David Maslach and
I studied, they account for over 95 per cent of
firms. And they also account for some 60-70 per
cent of employment. So they create a larger
share of jobs. Economically I guess, they’re
where the action is. They are the most
innovative, they adapt much more quickly, [and]
they adopt new technologies much more quickly.
They’re the engines of growth.
I see the Ontario government has launched a 165
million dollar venture capital fund to try to
encourage small and medium sized companies to
develop in Ontario. That’s not just for
internationalization, but they recognize that
small and medium sized companies are where the
action is. And so, it’s pretty important that we
understand what’s going on with these firms.
Q. What are some of the complexities
faced by firms that operate in international
markets versus those that remain domestic?
A. The list is almost limitless. You look
at things like: trade restrictions, exchange
rates, monetary policy, labour laws, legal
frameworks, power supply differences for your
electronic products, not least of which are
cultural differences. In many ways it can be the
cultural differences that throw up the biggest
barriers. There’s a difference –and we can
recognize this in our own culture –there’s a
difference between the way things are supposed
to work or indeed the way we represent that
things work, versus the way they actually work.
Now in other countries, that can be even more
dramatic because we haven’t grown up with those
kind of core basic assumptions about how people
interpret the world and the way things are
supposed to work. So getting that kind of
insightful, cultural knowledge internationally
can be fairly problematic for a lot of firms and
you need to get that kind of local knowledge in
order to understand how to do business
internationally.
Q. How can uncertainty be linked to both
impeding organizational performance and act as a
driver of organization performance?
A. Well, let’s look at the impeding
organizational performance first. Nobody likes
uncertainty, especially investors. Investors
really like to have some sense that they know
where their money is going, what it’s going to
be used for and what’s going to happen down the
road. So there has to be some kind of
predictability. That means that you have to be
able to plan.
Now, planning depends on having an environment
where uncertainties are fairly small. Now when I
think about uncertainty, I think about
uncertainty in terms of two variables:
complexity and dynamism.
Think of a graph where you have running across
the bottom you have the dynamism of your
particular industry or market. Now it can be low
on the left hand side or high here on the right
hand side. Complexity similarly can be low at
the bottom if the axis is going vertically,
[and] it can be high at the top. Where planning
works very best, where you’re the most certain
of the way things are going to work out is in
that bottom left hand quadrant where complexity
is low and where dynamism is low. In other
words, there are few enough variables [so that]
you can get a handle on it and they’re not
changing so quickly that you have to worry about
the variables changing with that impact. That’s
the ideal spot for planning. That’s where
planning works. Everywhere else, planning
doesn’t work so well because you’ve either got
increasing complexities so it’s difficult to
understand or increasing dynamism.
Now I’m not saying firms shouldn’t plan, indeed
they do need to plan –all firms need to plan
because other wise you’re like a rudderless ship
in the ocean [and] you kind of need to know
where you’re going. But you have to recognize
the limitations of planning and that it only
works in those kind of low uncertainty
environments. So uncertainty really, many people
suggest puts the brakes on internationalization
and performance generally.
On the other hand however, there are those [who]
argue that precisely because there’s uncertainty
there are opportunities. If you have uncertainty
that means you’re going to have market
imperfections. If you kind of know the state of
your market, you know what consumers want, and
you basically have perfect information, then
nobody is going to make any kind of above normal
performance. Where you have uncertainty, you
have the opportunity do the kinds of things that
other people can’t do, [or] perhaps aren’t
willing to do. So there are opportunities for
competitive advantages [and] for superior
performance if you’ve got uncertainty. So there
are those who argue that uncertainty really is
the stuff of entrepreneurship [and] really is
the stuff of growth.
Q. How do resource constraints develop
opportunity-seeking capabilities in uncertain
environments?
A. Particularly small and medium sized
firms, when SMEs are short on resources which
most of them are, particularly from the early
days, they have to find ways to overcome those
shortfalls. So for example, if a firm is short
on financial resources they might try and find
ways to get some cash out of the business model.
So they might ask their customers, their buyers,
to prepay for their products and services, a bit
like you do with a pay-as-you-go mobile phone.
You pay ahead of time and then you get the
service later. You can also work the other way
in your supply chain; you can go back to your
suppliers. And if the supplier believes in your
business model and what you’re doing you may be
able to get goods from suppliers –not at 30 days
net, but maybe at 60 days, maybe at 90 days net.
So what you’re doing is you’re actually using
the supplier’s money in order to work your
business model.
There are lots of ways that firms try to
overcome their resource constraints. And what’s
really interesting is that in overcoming those
resource constraints, firms learn something. You
know, there aren’t very many small and medium
sized companies that have all the resources that
they need and so they have to find innovative
ways to get their products and their services to
market. And they do that not by sitting around
and planning how they can perhaps get more
resources, but they actually go into the market
and they sort of sort it out as they go. And
this is a phenomenon that is really specific in
many ways to entrepreneurial small and medium
sized companies –by actually doing something, by
going ahead and doing something, they learn
something, and they find ways to overcome their
resource constraints. As opposed to kind of
sitting back and theorizing and planning, [where
you’ll] never rise above the current level of
organizational knowledge, which really is very
limited. So they get around their resource
constraints and in the process they learn
something which gives them a competitive
advantage.
Q. How do firms with acute resource
limitations learn and develop superior
capabilities in uncertain markets?
A. Acute resource limitations –that’s
when they’re really fairly constrained –are
usually found in crisis situations. Now,
professor Charlene Zietsma here at Ivey and
myself, we’ve done considerable research on how
firms in crisis situations can develop dynamic
adaptive capabilities. What happens is that
firms increase dramatically the kinds of things
they consider. So they listen to people to whom
formally they might not have given the time of
day. They look very broadly. They look for
diverse opinions. They look for any and all
solutions they can find to their particular
problems.
What they also do in the process, because
they’re looking so much more broadly for
information, and not relying on the rules of
thumb and the industry standards and so on, is
that they simplify. They get back to their core
value proposition, considering all that new
information. And what happens is that again, in
the process of actually doing something they
learn something. And what they learn is that
there are new ways of doing business, there are
new business models. And they can develop
capabilities which can turn into competencies
which will give them an advantage over their
competitors and perhaps sometimes take the
organization into a whole brand new direction.
What happens in those kind of crisis situations
is usually one of two things. Either the firms
disappear because they can’t find a way because
they’re severely resource constrained or they
learn something, which becomes a core competency
and they become more successful.
Q. What are some of the implications from
your research for managers and entrepreneurs?
A. A key finding of this research, really
kind of goes against the grain of what managers
traditionally do. And that’s that managers
should look at uncertainty not as a threat, but
as an opportunity. If business environments were
perfectly known, no firm would generate above
normal performance. So uncertainty opens up the
possibilities for greater performance.
From uncertainty comes competitive advantage.
Managers who truly lead organizations, rather
than merely serving as kind of
uncertainty-avoiding caretakers of the status
quo, have the potential to generate above normal
returns and competitive advantages.
Of course entrepreneurs are the very people that
thrive in uncertainty. They are seeking out
those opportunities in environments that others
may avoid. Our research suggests that
uncertainty is much more a driver of
internationalization performance, especially for
resource constrained firms. So, uncertainty
really drives new ways of delivering value to
wider markets internationally and for many
entrepreneurs and leaders that’s what makes
business just so exciting.
That was Michael Rouse, Professor of Strategy
and Organization at the Richard Ivey School of
Business.
Professor
Rouse's Homepage
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