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Performance of Exporting Small and Medium Sized Enterprises: A Longitudinal Pan-European Study Harold G.J. GANKEMA Assistant Prof. in Marketing and Market Research University of Groningen Faculty of Economics P.O. Box 800 9700 AV Groningen, The NETHERLANDS Phone: +31 50 3637068 Fax: +31 50 3637207 e-mail:
[email protected] Peter S. ZWART Professor in Small Business Management University of Groningen Faculty of Economics P.O. Box 800 9700 AV Groningen, The NETHERLANDS Phone: +31 50 3637068 Fax: +31 50 3637207 e-mail:
[email protected] Koos A. van DIJKEN Business Unit Manager, Manufacturing Industry EIM Small Business Research and Consultancy P.O. Box 7001 2701 Zoetermeer, The NETHERLANDS Fax: +31 79 3415024 Due to the establishment of the Internal Market the international environment of small and medium sized enterprises in Europe is changing rapidly. These changes are likely to lead to considerable restructuring of the European economy (Lawrence 1992, Buckley 1991). Manufacturing industries -- small as well as large -- have to adapt to these trends to sustain this increasing international competition (Douglas & Craig 1992). This study therefore researches how the performance of exporting SME's is influenced by their strategic behaviour, their firm and owner/manager characteristics and the nationa l environment. The panel data used are generated by the INTERSTRATOS group (Haahti et al. 1995). INTERSTRATOS is a longitudinal research project including eight European countries. Cluster analysis (Punj and Stewart 1983) results in four clusters of firms: Hipers, Moderates , Internationals and Loosers and describes their characteristics and differences in strategic behaviour. Strategic planning is found to be the most usefull instrument for improving the performance of Small and Medium sized Enterprises.
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1
Introduction
In January 1993, the twelve EC countries formed the Internal Market in which nearly all physical, technical and fiscal trade barriers are faded away. Due to the establishment of the Internal Market the international environment of small and medium sized firms in Europe is changing rapidly. Uniformity in product requirements and less time consuming border controls will lower the cost of international trade. The creation of a free trade zone throughout Europe, including the EFTA-countries, influences even more the developments of market conditions and competition today and in the near future. On the one hand, competition will get stronger, because foreign competitors can now enter the domestic market without complex formalities. On the other hand domestic firms can start to export activities and enter foreign markets more easily. In addition to these European developments, international trends in the manufacturing industry such as globalisation, acceleration of technical progress, shortening of product life cycles, changing relations between main and subcontractors and more international cooperation play a significant role. In this fierce international competition requirements concerning quality and logistics are increasing. Among firms there is an increase in both competition and collaboration, which has resulted in a search for improvement in competitiveness at the national, industrial, firm and product levels and has increased the attention to the source of competitiveness , use of joint ventures, alliances and other collaborative devices among firms. Second, there are political changes including deregulation; political, economic and financial integration; and changes in trade policies. For example, although Europe is clearly heterogeneous, some of the variation will be reduced by the Single European Market or by developments initiated by it. Third, technological imperatives are continuing to be important in international business. The increasing resources put into research and development play a major role in international competition and that is one reason for the growth of the alliance, joint research developments etc. Finally, social pressures are evident in international business. Demands for improvements in social conditions are determinants of future patterns. All of the above mentioned changes are likely to lead to a considerable restructuring of the world economy and of its constituent parts at the national, regional, local, firm and intrafirm levels (Lawrence 1992 and Buckley 1991). Manufacturing industries -- small as well as large -- have to adapt to these trends to sustain this increasing international competition (Douglas & Craig 1992). To realize growth, flexibility and quality
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improvement both internationally and locally operating firms will have to broaden their view and reconsider their strategies based on the relative strengths and weaknesses of the firms and the international environment. These recent developments lead us to examine how various SME's perform in various environments. The research goal of this study therefore aims at determining the factors that distinguish between more and less successfull internationally operating small and medium sized firms. The study concentrates on internal as well as external factors. Emphasis however, will be put on the strategic behaviour of the firm. 2
Theoretical framework
Recently, Aaby and Slater (1989) reviewed the empirical studies on management influences on export performance. They distinguished one export performance factor, three internal factors (competence, strategy and characteristics) and one external factor (environment). More recently, Bijmolt and Zwart (1994) suggested an alternative classification in their export policy success model. They distinguished firm characteristics and export policy explaining the export success of the firm. Their export policy factor includes the organizational structure, the export attitude and export planning. Holmiund, Kock and Vest (1995) concluded that SMEs are very dependent on their owner's and/or management's interest to engage in international business, and obviously the management must be committed, if the company is to have a possibility of succeeding. Transforming competitive potential into performance is a management task. According to Milne & Thompson (1982) growth and development of small businesses can be viewed in terms of how quickly the ownermanager can adapt and learn from the experience of dealing with the two environments (internal/external) within which the firm does its business. Furthermore it is generally agreed upon that for small businesses the objectives of the firm are identical to those of the owner or manager (O'Farrell and Hitchins, 1988). STRATEGIC BEHAVIOUR Strategies become imperative when discussing performance of firms, as strategy reflect the overall framework of how a firm should achieve success. The literature offers a wide range of strategy classifications of which this study only discusses a few. Based on the fact that most companies in one way or another seek to maximise profit, the various strategies are mainly concerned with exploring opportunities of growth. At the corporate level, the best known growth strategy was developed by Ansoff (1965). In the product/market expansion grid, Ansoff considers four different growth strategies based on two criteria, new or current product and new or current
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market. The four strategies are market penetration strategy, market development strategy, product development strategy and diversification strategy. Adding specifically the international aspect on strategies, Ansoff's growth matrix can be divided into 6 different strategies, adding an international market development strategy and an internationa l diversification strategy. A more recent view of strategy is introduced by Prahalad and Hamel, (1990), when suggesting that businesses today should identify and exploit the core competencies of the corporation in order to improve performance. The goal is to build leadership in the design and development of a particular class of product functionality and to sustain this leadership by maximizing the world manufacturing share in core products. Though this might lead to divesting part of a business and/or serving fewer customer groups, this is still a corporat e growth strategy, in this case just aiming at improving performance concentrating on the core competencies. Wheelen and Hunger (1990) mention different retrenchment strategies (eg. divestment strategy) which are also considered as concentration strategies. Mintzberg and Waters (1985) suggest that strategies can be deliberate or emergent, the latter meaning that strategies are constantly adjusted as opposed to planned and intended. The outcome of either strategy, that is the realized strategy, might not always be what was originally intended. The strategies researched in this study are the firm's realized strategies, as the research is based on historical data rather than managers future statements. In addition to the growth strategies, non-growing corporate strategies are also included in this study. Wheelen and Hunger (1990) pointed out additional corporate strategies to growth strategies, i.e. the stability strategy. The stability strategy is appropriate for successful firms operating in an non-growing industry of medium attractiveness. It involves no major changes, and in order to improve its competitive advantage, a firm concentrates its resources on present businesses. A stability strategy can be used if the task environment is likely to change radically at any moment and top management wants to see what happens before they change the course of the firm. In this study the following nine corporate strategies are considered: stabilisation, market penetration , concentration, international concentration, market development, international market development, product development, diversification, international diversification. FIRM CHARACTERISTICS
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The type of industry influences the firm's strategies and the intensity of international activity (Porter 1980). Porter (1985) identifies 5 groups whose actions may limit a firm's profitability: competitors, customers, suppliers, potential competitors and suppliers of substitute products. Every group is unique to the industry and may in turn affect performance. Many factors such as government intervention, technology intensiveness and intensity in price competition affect the relationship between industry structure and the firm's success (Jain 1989). ENVIRONMENT Performance of businesses is likely to vary within different countries. Country size determines the scope of the domestic market which in turn might influence the ratio of small businesses and their rate of internationalization. Differences within countries in politica l, cultural and social factors have an impact on business profitability in both domestic and foreign markets. Legal restrictions (eg. home subsidiaries, taxes, product restrictions) and exchange rates are factors known to influence performance of firms. (Jeannet & Hennessey, 1995). In accordance with Aaby and Slater (1989) we included the environment in our model in addition to the export success model of Bijmolt and Zwart (1994), because the environment of firms differs a lot throughout Europe. The final model can be visualised as in figure 1 (omitted) . The firms and the owner/manager characteristics together with the environment determine the strategic behaviour and indirectly have influence on the performance. The strategic behaviour of the firms embraces the attitude towards international business, the corporate strategies and the organizational structure the firm has adapted to international business. 3
Research Design
DATA The data are generated by the INTERSTRATOS group (Haahti et al. 1993).[1] INTERSTRATOS is a longitudinal research project into INTERnationalization of STRATegic Orientation of Small sized European enterprises in manufacturing industries. This project covers an annual survey research in several European countries for a period of five years, the first year being 1991. The project is a cooperation of research institutes in 8 European countries, namely: Austria, Belgium, Finland, Great Britain, The Netherlands, Norway, Sweden and Switzerland. The sample is stratified by firm size and branch.
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The selection criteria to choose these branches were: high percentages of small and medium-sized enterprises; various degrees of internationalization, of types of market, technological developments, of roles of subcontracting, of sensitivities for the completion of the internal market, of existence of economies of scale, of duration of the product live cycle and of the number of new entrants in the market. This selection procedure guarantees that for each country a representative mix of branches is selected. Therefore, the results of this study can also be representative for other branches as well. The data used in this study refer to the years 1991, 1992 and 1993, including only those firms that responded each year. This resulted in a sample of 1249 panel firms throughout Europe. As only exporting SMEs were included in this study and due to missing values concerning sales and export sales figures, the final sample size resulted in 270 exporting SMEs (see figure 2). Figure 2 InterStratos panel description Branches of manufacturing industry NACE NACE NACE NACE
43, 45 34 41, 42 46
NACE 31, 32 TOTAL
Frequency
textile and clothing electrical engineering food, drink and tobacco wooden and timber products, including furniture metal products and mechanical engineering
55 54 21 59 81 270
Employees 0-9 10-19 20-49 50-99 100missing
Frequency 23 41 88 76 40 2
Country of origin Austria Belgium Netherlands Switserland Norway Sweden Finland
Frequency 35 19 8 18 41 114 35
Exporting to
Frequency
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no export 1 country 2 countries 3 countries 4 countries 5 countries or more
13 27 56 54 45 75
As indicated above this study examines which factors influence the performance of international operating small and medium sized enterprises concentrating on strategic behaviour especially. The operationalisation of strategic behaviour, performance and the other factors of our model (figure 1, omitted) will be discussed in more detail below. Performance In order to measure the performance of international operating small and medium sized firms and to identify the variables contributing to this performance the study considers the growth of sales, the growth of employees and the growth of the export/sales ratio during the years 1991 to 1993 as the measurements of success. Growth of sales is one of the most common ways of measuring the rate of performance (Shaw 1995, Carpano and Chrisman 1995).[2] The growth of employees is a measuremen t often used to determine the growth of the small and medium sized firms and is measured by the number of full employees. The growth of the rate of internationalization measured by the change of the export/sales ratio is also often used to measure international success. Factors influencing performance To identify variables that contribute to various rates of performance of small and medium sized enterprises the factors firm and owner/ manager characteristics, environment and strategic behaviour are considered. * firm and owner/manager characteristics Firm characteristics are measured by the type of industry, number of employees, sales turnover, whether it is a subsidiary of another company or not and whether it is family owned or not. The owner/manager is characterised by his age and his years of experience as owner manager. * environment Environment is characterised by country of origin (Austria, Belgium, Netherlands, Switzerland, Norway, Sweden and Finland) and the change in negotiation position compared to customers and suppliers.
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* strategic behaviour Strategic behaviour is a factor that includes three subfactors, namely: export attitude, corporate strategies and organizational structure, - export attitude The export attitude factor describes the attitude of the owner/ manager towards changes and foreign trade. This was measured by four statements: * * * *
Changes in a business should be avoided at all costs. A firm should not leave the region where it is established. Managers should plan rather than follow there intuition. Small business should not hesitate to do business with large firms.
- corporate strategies The corporate strategies are measured by the change in the number of product groups, the number of client groups, and the number of countries (see table 1). From 1991 till 1993 three types of developments for each variable could be found; less, equal and more. Equal means the same number or a minor change of product groups or client groups or export countries. A change of only one, we defined as minor. Only major changes (two or more) lead to the categories less or more. In addition, sometimes the growth rate of sales was included as well. Table 1 shows the way firms are classified into the corporate strategy they implemented during the period 1991-1993. Because the strategies market penetration and stabilisation show similarity concerning the changes in # of product groups, # of client groups, and # of countries, the growth rate of sales was used to distinguish between these two strategies. A growth of more than 5% was considered to point to a strategy of growth (market penetration) and a growth rate of less than 5% was considered to point to a non growing strategy (stabilisation). Table 1 Classification of the corporate strategies STRATEGIES
# Product groups
# Customer groups
Stabilisation
equal
equal
equal
< 5%
Market
equal
less
equal
> 5%
h
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# Countries
Sales growt
83
penetration
less
more
less
Concentration
equal less less less
less equal less less
less less equal less
less
less
more
Market development
equal equal less
more more more
equal less equal
International Market development
equal equal equal less less
more equal less more equal
more more more more more
Product development
more more more more
equal equal less less
equal less equal less
Diversification
more more
more more
equal less
Int. Diversification
more
more
more
more more
equal less
more more
Int.nat concentration
Other
- organizational structure The organizational structure describes the adaptation of the firm to operating internationally. E.g. whether or not a firm has an export manager or an export department. This factor had to be left out of the research because the Interstratos data do not contain variables concerning organisational structure. METHOD OF ANALYSIS In order to get derive groups of firms with similar performance pattern s cluster analysis was applied. Punj and Stewart (1983) developed an approach in which cluster analysis is applied in phases. It starts with a cluster analysis by the hierarchical method of Ward. From the solution provided by this procedure a classification of the firms in
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a specific number of clusters is selected. For each cluster of firms the mean score of the export success indicators is computed. In the next phase, firms are reclassified to the clusters by assigning the firm to the cluster with which the mean scores correspond best to the firm scores on the export success indicators. This phase, computing mean scores for each cluster and reassigning the firms, is repeated until no firm moves to another cluster. The resulting classification of the firms is presented as the final cluster solution (Bijmolt and Zwart 1994). 4
Results
The number of clusters selected may depend, among other reasons, upon the variability between the clusters based on the variables used in the cluster analysis, the number of firms in each cluster, and the interpretation of the clusters. The cluster analysis resulted in four segments of firms, which differ on the three indicators and appear to be quite accessible to interpretation. These four clusters will be interpreted on the basis of the three performance variables (see table 2) and the descriptive variables. Table 2 Clusters and performance (all growth figures in %) CLUSTERS
1 2 3 4
138.3 6.0 8.7 -21.5
Cluster 1:
).
growth in sales
growth of employment 88.6 -2.2 -5.7 -18.6
growth of export sales ratio 126.9 18.7 136.0 -35.9
# of firms
14 109 47 100
High Performers (Hipers)
Cluster 1 is a rather small cluster containing 14 firms, i.e. 5% of the total sample. These firms show a tremendous growth of the sales turnover, employment and export sales ratio. Therefore this cluster of firms can be recognized as high performers (Hipers Hipers are more than average firms of the Textile and clothing industry and less than average of the Electronical and Mechanical engineering industry. Hipers are smaller firms in terms of sales turnover (50% realizes a turnover less than 1,5 million ECU) and only moderate internationalized (70% of the hipers are doing business in 3 or less foreign countries). Hipers are more than average founded in Austria, Switserland and The Netherlands and less than average in Norway and Sweden.
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The owners/managers have more than average experience and they plan rather than follow their intuition. They realised growth by a strategy of market penetration in 1991 as well as in 1992. Some hipers implemented a strategy of international market development or concentration. Cluster 2:
Moderates
Cluster 2 is the largest group of firms including 109 firms (53%). These firms are almost stable in their sales turnover, show a decrease of employment, and an increase of the export/sales ratio that is not very spectacular. These firms are doing not very well or very bad and could therefore be labeled as 'Moderates'. Moderates are found in all types of industry except for the Textile and Clothing industry. They are more than average founded in Austria.
-
n
Concerning all the other variables such as total turnover, number of employees, age and experience of the owner/manager, internation alisation and planning. Moderates are very moderate and do not differentiate themselfes from the total sample. Strategies implemented by Moderates are strategies of concentratio and stabilisation, but also some product development, market penetration and market development strategies were found. On average they diminished the number of product/market combinations and exported more.
Cluster 3:
Internationals
Cluster 3 includes 47 firms (17,5%) who show a moderate growth of sales, a decrease of employment and a tremendous growth of the export/sales ratio. These firms are very international oriented: 94% export to 2 or more foreign markets, 45% to 4 or more and 20% even to 5 or more. This group can be labeled as 'Internationals'. Internationals are firms with less than 100 employees. They are found in all types of industry and all countries of the sample. The category 'sales less than 1.5 million ECU' is slightly over represented.
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Owners/managers of Internationals are 45-60 years of age and have 16-25 years of experience. Some follow their intuition while others plan their activities. The corporate strategy implemented by Internationals is a strategy of concentration on known foreign markets, although some (international) market development also was found. Cluster 4:
Loosers
Cluster 4 is a cluster with 100 firms or 37% of the total sample.
/
This second largest cluster is performing outspokenly bad. They show a substantial decrease of the turnover, employment and export sales ratio. These very bad performers are labeled 'Loosers'. Loosers are not founded in Austria. Furthermore, they almost do not differentiate themselfes from the average of the total sample. They are found in all types of industry, all categories of sales; # of employees; experience and age of the owner/manager and intuition vs. planning. Loosers are quite internationalised: 35%
ies
exports to 5 countries or more, 51% to 4 or more. They actually welcome changes more than others. The corporate strategies implemented are strategies of concentration, although also strateg of product development and stabilisation were found. 5
Conclusions and Implications
On average a tendency of increasing internationalization was found among small and medium sized firms in the early nineties. Four clusters of firms were found: Hipers, Internationals, Moderates and Loosers. The variability in performance between these clusters is spectacular. High performers were found in the smallest cluster. These smaller firms are owned by more experienced entrepreneurs in the textile and clothing industry. Planning seems to be an important instrument for realising a substantial part of their growth. Hipers realise growth, without taking too much risk by choosing market penetration on a rather limited number of foreign markets as a strategy. The second best performing firms are the internationals. These very internationally oriented firms are expanding on foreign markets. The owners/managers are, as the hipers, more experienced and half of them are in favour of planning. Already active on a lot of foreign markets they implemented a concentration strategy, although some expanded into
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new (foreign) markets. The largest cluster includes the moderate performing firms. Also on other characteristics they seem to be just average firms. They concentrate on the product/market combinations in which they (still) have a competitive advantage, nationally as well as internationally. Their foreign markets are getting more and more important. Loosers, except for their performance, actually do have the same kind of characteristics. This large group of firms are hard to identify and especially hard to differentiate from the moderates. This thin line between the two clusters could imply that moderates are in a potentially dangerous situation. On average the variability in corporate strategies of SME's was rather small in the early nineties. International market development was not as profound as could perhaps have been expected. Most of the SME's implemented strategies of concentration and some market penetration. Concentration was found among the best and worst performers. The bette r performing firms however, expanded abroad. A concentration strategy only is successfull when the firm already is active on a lot of foreign markets.
A market penetration strategy is successfull only when a firm
already is moderately internationally involved. Penetration on international markets or international market development seem to be promising corporate strategies. The export attitude did not show any variability and therefore did not have any influence. The environment and type of industry only showed minor influence on performance. Performance seems to be most influenced by the owner/manager. Experience and planning are the far most discriminating factors between more and less successfull SME's. Planning instead of following intuition and more experience as an entrepreneur lead to a better performance. An entrepreneur only will gain experience by trial and error. Strategic planning however, can be implemented as soon as the entrepreneur is convinced of its importance. Therefore strategic planning should be recognised as a usefull instrument for improving the performance of small and medium sized firms. Further research will concentrate on modelling and estimating the causal relations using more advanced analyses as e.g. LISREL. Incorporating also the 1994 and 1995 data will shed light on a longer period of time and the situation after the European Union was formed. References Aaby N., Slater F.S. (1989) Management Influences on Export Performance
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: A Review of the Emperical Literature 178-88, International Marketing Review 6 (4) pp. 7-26. Ansoff H. I. (1965) Corporate Strategy, McGraw-Hill. Buckley P.J.(1991) The analysis of International Corporate Strategy: An integrated framework and research agenda. In Harals Vestergaard, editor, An enlarged Europe in the global economy. European Internationa l Business Association, Proceedings of the 17th Annual Conference 1991, Copenhagen, Denmark. Buckley P., Pass C.L., Prescott K. (1988) Measures of International competitiveness: A Critical Survey, Journal of Marketing Management, 4(2), pp. 175-200. Bijmolt, T.H.A., Zwart, P.S. (1994) The Impact of International Factors on the Export success of Dutch Small and Medium-sized Firms, Journal of Small Business Management, Vol.32, No.2 pp.69-83. Calpano C., Christman J.J. (1995) Performance Implications of International Product Strategies and the Integration of Marketing Activities, Journal of International Marketing, Vol.3.1, pp. 9-27. Douglas S., Craig S. (1992) Advances in international marketing, Research in Marketing, Official Journal of the European Marketing Academy, Vol. 9, pp. 291-318. Haahti A.J. et al. (1993), Internationalisation of Strategic Orientations of European Small and Medium Enterprises, INTERSTRATOS, EIASM, Brussel. Holmiund M., Kock S., Vest T. (1995) Small and Mid sized Companies' Internationalization -- A Network Approach, Working paper from The Swedish Schools of Economics and Business Administration, Helsinki, pp. 99-115. Jain S.C. (1989) Standardization of International Marketing Strategy: Some Research Hypotheses. Journal of Marketing 53, Jan, pp. 70-77. Jeannet J.P., Hennessey H.D. (1995) Global Marketing Strategies, Houghton Mifflin company, Boston, 3rd edition. Lawrence P. (1992) Developments in European Business in the 1990s: the Single European Market in Context, Journal of Marketing Management, pp. 3-9
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Milne T., Thompson M.(1982) The infant business development process, University of Glasgow, Management Studies Working Paper No.2. Mintzberg H., Waters J. (1985) Of strategies, deliberate and emergent, Strategic Management Journal, Vol. 6, pp 257-272. Mitchell W., Shaver J.M., Yeung B. (1993) Performance Following Changes of International Presence in Domestic and Transition Industries , Journal of International Business Studies, 4th quarter 1993, pp 647-669 . O'Farrell P.N., Hitchins D.W.N. (1988) Alternative theories of smallfirm growth: A critical review, Environment and Planning, 20, pp. 1365-1382. Porter M.E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York, The Free Press. Porter M.E. (1985) The Competitive Advantage, New York, The Free Press Prahalad C.K., Hamel G. (1990) The Core Competencies of the Corporation , Harvard Business Review, May-June 1990, pp. 79-90. Punj G., Stewart (1983), Cluster Analysis in Marketing Research: Review and Suggestions for Application, Journal of Marketing Research, May 1983, p. 134-148. Shaw V. (1995) Successful Marketing Strategies, Industrial Marketing Management, Vol. 24. Wheelen T.L., Hunger J.D. (1990) Strategic Management, Adddison-Wesley Publishing Company, New York, 3 edn. [1]
The Interstratos Research Group consists of Hanns Pichler, Erwin Frohlich (Austria), Rik Donckels, Ria Aerts (Belgium), Graham Hall (Great Britain), Annti Haahti, Petri Ahokangas (Finland), Koos van Dijken, Yvonne Prins, Harold Gankema (The Netherlands), Per-Anders Havnes, Arild Seather (Norway), Hakan Boter, Carin Holmquist (Sweden), Hans Pleitner, Margit Habersaat (Switzerland).
[2]
In literature much attention is paid to market share (Buckley, Pass and Prescott 1988, Mitchell, Shaver and Yeung 1991, Shaw 1995) and to return on investment (Carpano and Christman 1995) as relevant performance measures. Both these measures are
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difficult to determine as the ROI is influenced by fluctuation in currency exchange rates and the sizes of the market share depend on the market definition, which may be very complex to compute. For these reasons and due to the collected data these measurements are not relevant in this study.
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