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Internationalization of SMEs exemplified for software companies

Hausarbeit (Hauptseminar) 2017 23 Seiten

BWL - Unternehmensforschung, Operations Research

Leseprobe

Table of contents

Executive Summary

Table of contents

List of abbreviations

List of figures

1 Introduction
1.1 Problem and objective
1.2 Scope of work

2 Fundamental terms
2.1 Definition of SME
2.2 Definition of Internationalization

3 International management of SMEs
3.1 Motives and goals of Internationalization
3.2 Special characteristics of SME

4 International strategy development
4.1 Target market selection
4.2 Form of market entrance
4.2.1 Export
4.2.2 Licensing / Franchising
4.2.3 Branch establishment
4.2.4 Subsidiary establishment
4.2.5 Joint Venture

5 Internationalization strategy of software companies
5.1 Preliminary considerations
5.1.1 Standard vs. Customized standard software
5.1.2 Local standardization of products
5.2 Resuling strategies
5.2.1 Target market selection
5.2.2 Form of market entrance

6 Conclusion and Outlook

References

ITM - Integral Total Management

List of abbreviations

Abbildung in dieser eseprobe nicht enthalten

List of figures

Figure 1: Phases of target market selection

Figure 2: Market attractiveness-competition matrix

Executive Summary

The process of globalization has changed our world in a number of ways. From companies’ perspectives new production and sales markets have arisen beyond local borders and their numbers continue to grow. The motives and goals of internationalization of SME are, in general, very similar to those of bigger companies. The most important factors are additional market opportunities and thus a higher sales potential of products that are already established on the home market. The internationalization of companies entails opportunities but also risks. Several key factors must be considered and specific requirements fulfilled. The prerequisites and also the demands of SMEs differ considerably from bigger companies.

A company’s business success in a foreign market depends significantly on the capability of finding a suitable and attractive market for one’s own product and service offers. After identifying the target market, the form of market entrance needs to be chosen. The typical forms are the export, licensing/franchising, branch establishment, subsidiary establishment and the joint venture.

Regarding the software industry, the internationalization strategy depends highly on the degree of standardization. On this case the need of international customization must also be taken into account. For standard software providers a high similarity between the target and the home market might be necessary, while for customized standard software providers, certain differences are less relevant provided there is at least a common basis. Providers of custom software can choose the market more flexibly.

An export or licensing strategy is only realistic and affordable for standard software providers. Providing customized standard or even custom software requires close customer relationship. In this case on-site-presence is highly recommended.

1 Introduction

1.1 Problem and objective

The process of globalization has changed our world in several ways. From companies’ perspectives new production and sales markets have arisen beyond local borders and their numbers continue to increase. Beside these new opportunities due to the removal of trade barriers and improvements in communication and transport, many local companies experience a reduction in growth due to increasing market saturation in their home markets. In addition, the pressures imposed by such a competitive open market demand an internationalization of these companies capable of operating on international markets. Even though the first companies that have followed this path were the larger ones, many small and medium sized enterprises (SMEs) have in the meantime entered the global stage.

The internationalization of companies entails opportunities but also risks. Several key factors must be considered and specific requirements fulfilled. The prerequisites and also the demands of SMEs differ in part considerably from the bigger ones.

1.2 Scope of work

This assignment is an introduction into the first steps and the specific challenges of SMEs in the course of internationalization. Short definitions of the terms of internationalization and SMEs, an overview of the companies’ motives and goals, and specific characteristics related to this topic are given. Subsequently, the different options and decision-making processes are presented and specifically exemplified for software providing companies.

2 Fundamental terms

2.1 Definition of SMEs

There is no uniform definition of SMEs. Usually the distinction is made on a quantitative and a qualitative basis.[1] Very common quantitative criteria are the annual turnover and the number of employees. According to the definition of the commission of the European Union (EU), SMEs are companies with less than € 50m annual turnover and 250 employees. An additional criteria is a balance sheet total below € 43m. Within the SMEs, additional gradations are defined declaring companies as small (less than 50 employees and € 10m annual turnover) and micro (less than 10 employees and € 2m turnover). [2] In Germany for example, where SMEs play a very important role by generating more than half of the net value added[3], all companies with an annual turnover below € 50m and less than 500 employees belong to this category.[4]

Beyond these quantitative criteria, numerous qualitative criteria, especially regarding organizational and guidance characteristics are typically attributed to the SMEs. According to Mugler[5], these criteria’s can be:

- The company is characterized by the personality of the entrepreneur who is often the company’s sole manager and owner
- The manager (and owner) has a relevant network and personal contact to customers, suppliers and other important stakeholders
- Hierarchies are flat and manager(s) and employees have close contact and deal with each other informally

2.2 Definition of Internationalization

The increasing globalization does not only lead to a stronger international trade, but also to an enhanced mobility of services, capital, human resources and know how.[6] For company’s this fact not only brings new opportunities but also leads to an increasing competition and the necessity to increase their market areas and to internationalize their activities. The common definition of internationalization covers any activities outside of the home market. This already includes the export of goods into a foreign market.[7] According to the EU, even the import of goods and services is classified as a form of internationalization.[8]

3 International management of SMEs

3.1 Motives and goals of Internationalization

The motives and goals of internationalization of SME are, in general, very similar to those of bigger companies. The most important factors are additional market opportunities and thus a higher sales potential of products that are already established in the home market. Since these home markets are often already saturated, internationalization has the potential to ensure profits.[9] This strategy is more than only an attractive opportunity. In the course of globalization, the borders between countries and the size differences of companies has lost importance. As a result a stronger international set up becomes an increasingly crucial factor in order to stay competitive.[10]

There are several additional benefits that might be relevant particularly for SMEs: The diversification of the business among different markets also means a distribution of risks. Weaker individual markets can be compensated for by stronger ones.

Furthermore, market expansion can lead to greater efficiency and economies of scale. By expanding production, costs per unit can be reduced and utilization of existing manufacturing capacities can be improved.[11] Additional motives can be a greater customer proximity or lower distribution costs (by opening a foreign branch in a country in which products are already exported), access to particular resources or circumventing restrictions or regulations in the home market.[12]

3.2 Special characteristics of SME

SMEs face additional challenges in the course of internationalization compared to larger companies. This results from their smaller size and the associated lack of resources: The management team of SMEs is usually small and often strongly focused on the founder and owner of the company. This results firstly in a high dependency on the decisions of a few persons, and secondly in the non-existing possibilities for setting up executive teams that focus on this particular project.[13] In addition, the financial resources of SMEs are strongly limited. This fact not only hampers the strategic scope, but also leads to a huge entrepreneurial risk. Bad investment decisions have the potential of threatening the existence of the entire company.[14]

The relevant possible special challenges of SMEs can be summarized as follows[15]:

- Limited career opportunities and comparatively low salaries in SMEs often result in a lack of highly qualified employees and particularly managers.
-SMEs often face a competitive disadvantage due to lower product volume and therefore lower margins.
- Decisions in SMEs are often focused on a few persons with a strong influence on the internal organization whereas internationalization may require more differentiated and individual adaptions.
- The often conservative way of thinking of the founders and mangers of SMEs might not be compatible with the required strategic approach.
-The comparatively low equity base of SMEs limits the scope of action and bears a huge financial risk.

But there are also several advantages of SMEs:[16]

- The already mentioned focusing on a few managers also means short- decision-making paths potentially leading to fast, favorable and flexible actions.
- The smaller company size also leads to a higher flexibility and a higher innovative capability. Adapting products to the prevailing conditions and reacting to changing market conditions may happen faster.
- SMEs are often more focused on customer service and consequently are closer to their customers and their needs. This can be a tremendous competitive advantage.

4 International strategy development

4.1 Target market selection

The success of a company’s business in a foreign market depends significantly on the capability of finding a suitable and attractive market for the own product and service offers. As a first important step a target market analysis is usually performed. The purpose of this evaluation is to identify the relative attractiveness of one’s own products in order to find markets which:[17]

- fit into the company’s strategic approach
- promise a high sales potential for the company’s products
- have a calculable risk
- allow the company to make use of their competitive advantages
- can be served with the current company’s or acquirable resources

The approach of identifying a suitable and attractive market can be summarized in 4 phases (fig. 1):

Figure 1: Phases of target market selection

Abbildung in dieser eseprobe nicht enthalten

Source: Own representation based on Sternad, D., Beurteilung und Auswahl von Zielmärkten, 2013, p. 44f

During the first phase, a pre selection of suitable countries that come into consideration is done. Usually, in this step, all countries are sorted out that do not fit into the company’s internationalization strategy (e.g. due to geographical or political reasons) or that have insuperable barriers for doing business.[18]

In the second phase, a comprehensive analysis of the attractiveness but also the risks of the market is conducted. Criteria for attractiveness can be for instance the sales volume, market growth, the price-/cost situation, competition, the supply situation or the infrastructure.[19] An additional issue to be considered is the similarity between the target and home markets.

[...]


[1] Cf. Dubs et al., Einführung in die Managementlehre, 2004, p. 295

[2] Cf. European Union, Commission recommendation, 2003, Annex, Art. 2

[3] Cf. Federal Ministry for Economic Affairs and Energy, The German Mittelstand, n.y.

[4] Cf. Institut für Mittelstandsforschung Bonn, KMU-Definition, n.y.

[5] Cf. Mugler, J., Grundlagen der BWL der Klein- und Mittelbetriebe, 2008 p. 25 ff

[6] Cf. Jaeger, F., Globalisierung - Krise oder Chance für die KMU, 2000, p. 25

[7] Cf. Gutmann, J., Kabst, R., Internationalisierung im Mittelstand, 2000, p. 8f

[8] Cf. Jakobsen, L., Internationalisierung von KMU, 2004, p. 7

[9] Cf. Höhner, B., Internationalisierung von KMU, 2006, p. 18f

[10] Cf. Kruse, P., Internationalisierung der Absatzmärkte, 2009, p. 24

[11] Cf. Höhner, B., Internationalisierung von KMU, 2006, p. 19f

[12] Cf. Höhner, B., Internationalisierung von KMU, 2006, p. 19f

[13] Cf. Kruse, P., Internationalisierung, 2009, p. 28

[14] Cf. Kruse, P., Internationalisierung, 2009, p. 29ff

[15] Cf. Bülk, J.-H., Markterschliessungsstrategien, 1997, p. 54

[16] Cf. Höhner, B., Internationalisierung von KMU, 2006, p. 21f

[17] Cf. Sternad, D., Beurteilung und Auswahl von Zielmärkten, 2013, p. 40f

[18] Cf. Sternad, D., Beurteilung und Auswahl von Zielmärkten, 2013, p. 44f

[19] Cf. Reisinger, S. et. al, Strategisches Management, 2013, p. 109

Details

Seiten
23
Jahr
2017
ISBN (eBook)
9783668779273
ISBN (Buch)
9783668779280
Sprache
Englisch
Katalognummer
v437734
Institution / Hochschule
FOM Hochschule für Oekonomie & Management gemeinnützige GmbH, Köln
Note
1,7
Schlagworte
Internationalization Internationalisierung SME KMU Software companies Softwarefirmen

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Titel: Internationalization of SMEs exemplified for software companies