Anna Katharina Ganser

International Experience, Environment and Economic Performance:

Insights into SME’s Internationalisation Process

Anna Katharina Ganser

Newcastle University and University of Groningen

Dual Masters Award Advanced International Business and Management

Supervision:

Dr. Joanna Berry (Newcastle University) Dr. Igor Kalinic (University of Groningen)

Katharina Ganser

Abstract

This paper argues that a firm’s external environment mediates the relationship between international experience and economic performance when considering the internationalisation of SME’s. The researcher has conducted an inductive research methodology focusing mainly on a single case study. The results of this research are a set of propositions for further research. Their aim, to answer the study’s research questions: ‘why and how’ a firm’s international experience can have a direct influence on its external environment and further ‘why and how’ a firm’s external environment can directly influence its economic performance. The paper’s findings will be of use to academic scholars because its results and the theory it establishes is an addition to current literature regarding the internationalisation of SME’s, in particular the effect and role of a firm’s external environment. Additionally, it will be of practical use to the management of organisations, by supporting the individual decision maker to avoid or at least reduce mistakes related to the company’s external environment in the context of the organisation’s internationalisation process.

Key Words:

Acknowledgement

I wish to thank Dr Joanna Berry and Dr Igor Kalinic for their continued support and guidance throughout this research. Thank you to my friend Tori Tomlin who enabled and supported the cooperation with Hardy my Case Company. Thank you to the Hardy Management Team, Dave Douglas, Chris Bond, Ken Brewster, Jim Murphy and Ian Bell, as well as to Geoff Young from UKTI to take the time to answer my questions, the research would have not been possible without your input. But also without the support of my family and friends, this study would not be what it is now, thank you Patrick in particular.

Katharina Ganser,

Table of Content

1. Introduction

8

2. Theoretical Background

11

2.1. The Internationalisation process of SMEs 11

2.1.1. The Uppsala Model 11

2.1.2. The Theory of International Entrepreneurship 12

2.1.3. The Importance of Networks 13

2.2. The Importance of International Experience 14

2.2.1. Organisational Learning 14

2.2.2. The Role of the Top Management 15

2.2.3. Insights into the Experience/Performance Relationship 15 2.3. Organisational Environmental and External Settings 17 2.3.1. Firm’s External Environment in the Context of Organisational Theory 17 2.3.2. Differentiations within Firm’s External Environment 18

3. Research Methodology

21

3.1. Research Setting 22

3.1.1. Hardy – Organisational Overview 22

3.1.3. The Fishing Industry 23

3.1.4. UK Trade and Investment 23

3.2. Data Sources 24 3.2.1. Informants 24 3.2.2. Interviews 24 3.2.3. Archival Documents 26 3.2.4. Research Summary 26

4. Analysis of Data

28

4.1. Why does a firm’s international experience influence its external environment? 29 4.2. How does a firm’s international experience influence its external environment? 33 4.3. Why does a firm’s external environment influence its economic performance? 38 4.4. How does a firm’s external environment influence its economic performance? 41

5. Discussion

50

5.1. Towards the Model: Environment – a Mediator within the Experience/Performance

Relationship? 50

5.2. The Research Model 53

6. Conclusion

55

6.1. Contributions and Implications 56

6.2. Research Limitations and Future Directions 57

7. References

59

8. Appendix

65

Appendix I: Reflective Statement 65

Appendix II: Interview Schedule 66

Appendix III: Informant Consent Form 67

List of Figures

Figure 1: Research Proposition 50

Figure 2: Research Model – Direct Links 53

Figure 3: Research Model – Indirect Links 53

List of Tables

Table 1: Summary Table including Author, Research Focus and Research Findings 20

Table 2: Research Sources 24

Table 3: Research Process 27

Table 4: Summary – ‘Why’ International Experience influences External Environment 32

Table 5: Summary – ‘How’ International Experience influences External Environment 37

Table 6: Summary – ‘Why’ External Environment influences Economic Performance 40

“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of Science, whatever the matter may be.”

Lord Kelvin, 1883

1. Introduction

Today when considering the rapid changes in the business landscape that have occurred throughout the past decades, almost every firm and enterprise is somehow affected by some kind of international challenge. Since 1990, global trade has grown 6% faster than global GDP, pushing Small-Medium sized Enterprises (SMEs) into the spotlight of the international business arena, becoming ever more important to boost economic growth (EC, 2007). Hence, research into the development of SMEs is a key topic within international business literature (Kamakura, Ramón-Jerónimo and Gravel, 2012). As a result SMEs have seen increasing interest within current research, due to their economic development and growing relevance within the worldwide economic system, and as such, have a major impact on the future wealth of countries and their populations (Knight, 2001; Shrader, Oviatt, and McDougall, 2000). Consequently the question, if SMEs with international experience can achieve greater economic performance when compared to bigger firms is a central topic in current literature (Camisón and Villar-López, 2010). Research in this area presents contradictions regarding the direct effects of experience, on firm’s performance (Chin-Chun and Boggs 2003). Hence research shows that higher economic performance, related to international growth, does not only result from international experience alone (Camisón and Villar-López, 2010).

Literature offers different methods to examine the experience/performance relationship: Luo and Peng(1999) are concerned with the external settings of an organisation, and investigate the role of a firm’s external environment, presenting it as a moderating factor within this relationship. In contrast, Camisón and Villar-López (2010) focus on the internal aspects of a firm, and identify intangible assets as a mediating factor, through which international experience influences indirectly on firm’s economic performance. In response to

internationalising SME. This research is important as it offers a new theory, bringing a new perspective to the investigated relationship, and can explain issues related to internationalisation in greater detail when compared to previous literature. This is essential as research to date fails to investigate in much depth, the process of how organisations and environments are related, and how this relationship develops over time (Dutton and Dukerich, 1991). Furthermore, considering firm’s long-term strategy, the contemplation of firm’s

external environment represents a critical element as changes in institutional and regulatory environment, as well as in managerial and consumer perception, has motivated organisations to shift from a reactive approach to a proactive approach when addressing environmental issues (Hoffmann, 1999).

As such, the main goal of this research is to analyse the consequences of environment and if experience and performance can be directly related to it. In detail, this paper will establish a new approach of the relationship under study, by presenting a new theory. In order to do so the research aims at answering four research questions, which are:

“Why does a firm’s international experience directly influence its external environment?” and “How does a firm’s international experience directly influence its external environment?” Further, “Why does a firm’s external environment directly influence its economic performance?” and “How does a firm’s external environment directly influence its economic performance?”

Through these questions, the paper offers at least three important contributions to literature: Firstly, research shows that firm’s economic performance, benefits from international experience when internationalising, and secondly it is able to document a mediating role of firm’s external environment within its experience/performance relationship. Lastly, this paper extends knowledge about the importance of different types of external factors to the internationalisation process. Therefore, the research concludes with a concept of internationally exploitable external factors mediating the relationship between international experience and economic performance and hence represents a substantial contribution to literature.

2. Theoretical Background

2.1.

The Internationalisation process of SMEs

A very recent study conducted by the European Commission (EC, 2010) states that “internationally active SMEs report an employment growth of 7% versus only 1% for SMEs without any international activities”. “26% of internationally active SMEs introduced products or services that were new for their sector in their country; for other SMEs this is only 8%” (EC, 2010). Consequently, the SMEs’ internationalisation process merits great

attention.

2.1.1. The Uppsala Model

One of the first research approaches focusing on the internationalisation process of a firm was Johanson and Vahlne’s (1977, 1990) developed model known as the Uppsala model. The Uppsala model describes a firm’s stepwise internationalisation; it aims at explaining how market risk can be managed through the acquirement of tactic knowledge of foreign markets and the incremental change of a firm’s commitments in those markets. It focuses on traditional cross-border behaviour with the critical assumption that market knowledge1 is primarily acquired though experience, hence, by experiential knowledge2 from current business activities in the market. Thus, experiential market knowledge offers advantages by generating business opportunities and consequently can be viewed as a driving force for the internationalisation process of a firm. Accordingly, within this line of reasoning experiential knowledge is also believed to lower market uncertainty (Johanson and Vahlne, 2009). Following the Uppsala model and its fundamental idea, it is argued that internationalisation is commonly started within foreign markets close to the domestic market in terms of psychic distance3. Therefore, firms would only later start to enter other foreign markets further away from a psychic distance point of view. The above described process has

1

Market Knowledge: important for a successful expansion into a new market, involving market opportunity and problems

2

There are two kinds of knowledge: Experiential knowledge, gained through experience and objective knowledge, which can be taught (Penrose and Pitelis, 2009).

3

its origin in the liability of foreignness, meaning that internationalising firms start to enter countries perceived as culturally, economically and geographically close, before steadily moving towards other countries (Zaheer, 1995). In sum, internationalisation is interpreted as a process in which the enterprise constantly increases its international development; this process involves on one hand the interaction between the development of knowledge about foreign markets and operations, and a growing commitment of resources to foreign markets on the other (Johanson and Vahlne, 2009).

2.1.2. The Theory of International Entrepreneurship

Within the early 1990s, a trend of firms internationalising at a younger age and smaller size than had been considered so far (Gupta, 1989) was noticed, and in more recent times research started to challenge the existing internationalisation theory. This trend was further highlighted by a McKinsey study of new ventures in Australia, uncovering surprisingly aggressive international activities (McKinsey & Co, 1993). Additionally, a survey investigating small transnational corporations worldwide, conducted by the United Nations showed falling barriers to internationalisation activities of small firms and an increase in numbers of SMEs bypassing the incremental, traditional pattern of internationalisation (UNCTAD, 1997). Hence, traditional, gradualist models suggesting an incremental, multi-stage process of internationalisation became increasingly challenged by those authors who support theory pointing towards firms, which were likely to engage in an accelerated and rapid internationalisation. Research particularly focused on international new ventures (McDougall, 1989), global start-ups (Oviatt and McDougall, 1994) or born-globals

2.1.3. The Importance of Networks

Networks, similar to knowledge help to access foreign markets and information more easily by spotting profitable opportunities to establish new relationships (Kalinic and Forza, 2012). Lately, also Johanson and Vahlne (2009) recognised the importance of networks within the internationalisation process. By revising their model, they point out that the liability of foreignness is no longer a major threat to organisations but the liability of outsidership4. Coviello and Munro (1995) show that internationalising SMEs’ behaviour may

seem irrational and random, but is actually based on rational behaviours motivated and driven by opportunities offered through the interactions with network associates. Hence, network partners can create awareness of striking opportunities, offering competitive advantage to the SME, but also enhance a firm’s learning process and push its foreign market sales (Oviatt and McDougall, 2005). Additionally, the social network theory approves that the interaction within network relationships can be characterised as an exchange of knowledge between the involved business partners (Ahuja, 2000; DeCarolis and Deeds, 1999). An approach on network types shows that particularly the conduit of technological knowledge exchange within a network takes longer, due to its greater complexity and uncertainty than the exchange of marketing knowledge, when measuring the influence of knowledge on firm performance (Reuber and Fischer, 1997). Accordingly, they also record that time impacts these relationships, they particularly investigate how the interaction within a network structure, time and task complexity affect performance. Finally, they conclude that when concentrating on a firm’s technology alliances, a high degree of network cohesion (more ties within the network), rather inhibits the internationalisation process of an organisation, in fact, sparse networks (less ties within the network) enhance the development of capabilities related to technological knowledge, which is uncommon and hence likely to be unique. In contrast, in networks involving marketing alliances, a high degree of cohesion was found to encourage foreign sales, as this close association between the network partners can enhance and secure the reliability and quality of foreign marketing knowledge transferred (Reuber and Fischer, 1997)

.

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2.2.

The Importance of International Experience

To actually use opportunities offered and presented by home and host country or network relations, firms have to learn and gain experience.

2.2.1. Organisational Learning

Organisational learning explicitly refers back to an adaptive process, which explores and exploits knowledge and enables organisations to respond to changing environment

(March, 1991), hence, Levitt and March (1988: 320) defined organisational learning as organisations’ “encoding inferences from history into routines that guide behaviour”. Additionally, Huber (1991: 89) states, “an organisation learns if any of its units acquires

knowledge that it recognises as potentially useful to the organisation”. Hereby, a key fact of organisational learning is that it particularly acquires knowledge and gains understanding from experience (Levintal and March, 1993). Therefore, experience can be seen as the prime source of learning in enterprises (Penrose and Pitelis, 2009). Accordingly, experience can be defined as the intensity of exposure to a certain host country environment, because of the length of engagement in different operations and as the diversity of such an exposure, referring back to the breadth of operations in a host country. Following this definition, experience allows organisations to gain country specific knowledge (Luo and Peng, 1999). Over time, it will be the accumulated experience, which provides foreign firms with the necessary knowledge of the local markets to overcome the liability of foreignness as well as the liability of outsidership (Johanson and Vahlne, 2009). Several studies indicated that host country experience primarily facilitates subsidiary profitability, and even present evidence that it positively impacts subsidiary performance (see for example Delios and Beamish, 2001; Miller and Eden, 2006; Uhlenbruck, 2004). As a result, numerous researchers explored different categories of international experience (see for instance Benito and Gripsrud, 1992; Li, 1995; Yu, 1991). All studies predict that international experience is in fact the crucial factor for successful overseas expansion (Luo and Peng, 1999). Additionally research drawing upon organisational learning theory5 , documents that experience positively influences firm’s performance, as the experience can help firms to refine their routines to decrease complexity and simplify practices in current operations (Levinthal and March, 1993).

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2.2.2. The Role of the Top Management

The experience of a firm in an international context is often influenced by the top manager’s individual exposure to different foreign markets the organisation operates in, and hence impacts its internationalisation behaviours (Angelmar and Pras, 1984). In contrast to large firms6, SMEs with fewer resources may largely rely on the skills and knowledge of their top management teams and the decision makers to predict and influence the firms’ internationalisation (Oviatt and McDougall 1994; Reid 1981). Especially characteristics such as the degree to which a manager has travelled internationally, or the number of foreign languages learned and spoken are important. Decision makers who were born, lived or worked abroad are also considered as key factors for success in international export (Reid, 1981). In this context, the ‘upper echelon’ perspective stresses the importance and influence

of top management teams experience on organisational outcomes (Hambrick and Manson, 1984). On the whole, research highlights the fact that management itself is a shared power, influencing a firm’s behaviour and outcomes collectively (Reuber and Fischer, 1997). Although research predominantly focuses on larger firms, however, the interaction of top management experience and firm’s performance is predicted to be even more significant among SMEs, as these organisations rely even more on the central role of the leading team

(Feeser and Willard 1990). However, the upper echelons perspective also stresses the argument, that the impact of decision makers should be considered as indirect instead of direct. Hence, the international experience of the management team is believed to influence SME behaviour, this behaviour is observed as a mediator by influencing business performance (Reuber and Fischer, 1999).

2.2.3. Insights into the Experience/Performance Relationship

Despite the fact that empirical studies investigating experience and performance document that experience enhances performance (Delios and Beamish, 2001; Miller and Eden, 2006; Uhlenbruck, 2004), others do not, with research focusing on the relationship between experience and performance yielding inconsistent findings. Moreover, other writers observed mixed results for experience and performance (see for example King and Tucci, 2002; Vermeulen and Barkema, 2001). Hence, the discussion whether experience influences

6

directly or rather indirectly on firm’s performance continues, as the relationship between experience and international expansion performance appears to be more complicated than most aforementioned authors have assumed. Particularly, the Camison and Villar-Lopez’s (2010) model shows that better economic performance related to international growth does not necessarily result from a firm’s international experience alone. They postulate that SME’s international experience will only have an indirect effect, instead of a direct repercussion on economic performance. This argument also challenges Luo and Peng’s (1999) study, which documented the moderating effect of environmental forces on the experience/performance relationship. This leads to the assumption that during international expansion, the individual organisational external environment of the specific host country may moderate the relationship between experience and performance. As institutional, economic and socio-cultural environments may vary between economies, environmental uncertainties seem to be responsible for harming prior learning gained within the home country and different host countries, which turn out to be ineffective in a new host country’s new dynamic settings

2.3.

Organisational Environmental and External Settings

Agreed among management scholars, environment is one of the key dimensions affecting firm’s economic performance and further even its survival (Oliva and Suarez, 2007). In fact, environment is directly related to industry - as well as organisational-level issues and hence, can be a source of threats or opportunities with regards to firm performance

(Siggelkow, 2002). Furthermore, Demirbag, Tatoglub and Glaister (2007) argue that environmental factors that operate at different levels can be within and also beyond managers’ control, thus organisations have to adapt to their environment to survive and succeed (Thompson, 1967). When examining literature discussing organisational environment, different approaches can be found.

2.3.1. Firm’s External Environment in the Context of Organisational

Theory

Andrews (1999: 48) for instance, focuses on firm’s competitive environment and

therefore defines the environment of a company as “the pattern of all the external conditions and influences that affect its life and development”. Accordingly, he identifies five environmental dimensions: economic, technological, physical, political and social. In line,

Child, Chung and Davies (2003: 243) refer back to natural selections and claim, “firms

operating under more favorable external circumstances have a better chance of prospering”. Hence, Peng (2001) and Makino, Isobe and Chan (2004) similarly highlight the importance of political, economic, cultural, social and institutional differences among countries and argue that indeed countries matter when aiming at explaining variation in behaviour and performance of SMEs. Considering aforementioned implications it seems logical that the environment is recognised as an important feature in several leading theories such as the resource dependence theory7 and institutionalisation theory8(Rosenzweig and Singh, 1991). When discussing organisation’s environment in the context of organisational theory,

Rosenzweig and Singh’s (1991: 355) research is particularly interesting as they refocus their attention on two central questions: “How do environments affect organizations? And how do organizations affect their environments?”, stating that internationally operating enterprises, including interdependent subunits established in different countries, face various kinds of

7

Resource dependence theory: organisations actively engaged in exchanges with the environment to improve performance (Pfeffer and Salancik, 2003).

8

Institutionalisation theory: organisations seek to adopt processes or structures reflecting the institutional environment

pressure imposed by environments on the organisation, as environment is not uniform. However, the survival of single subsidiaries may be linked less to resources in the local environment, but be more dependent on resources from other sources within the company. Nevertheless, they still regard the question of the nature of the organisational environment as important. International organisations are considered a set of differentiated structures and processes, and those are influenced by different environmental factors, facing pressure for conformity, to conditions in the local environment and an imperative for consistency within the organisation (Rosenzweig and Singh, 1991). Thus, this approach emphasizes tensions between national responsiveness and forces for global integration.

2.3.2. Differentiations within Firm’s External Environment

A different way of approaching firm’s external environment was introduced by organisational behaviourists who distinguished between two levels of environment – the task environment and the general environment. Adjusted to the name, the task environment describes the level close to the firm, including sectors that have transactions directly with the organisation, such as customers, suppliers and competitors. Accordingly, the general environment characterises a level somehow removed from the organisation, involving sectors that indirectly influence organisation, such as social, demographic and economic sectors

(Bourgeois, 1980; Dill, 1958). Linking this taxonomy to firm’s performance, researchers

emphasise that the task environment is more complex, more dynamic and hence, more influential on organisations development than the general environment (Draft, Sormunen and Parks, 1988). Porter’s (1980, 1990) introduced framework of ‘Porter’s five forces’9 can be considered as a form of operationalization of the task environment, highlighting direct implications for firm’s performance. In detail, the framework depicts the environment as a composition of so-called five forces whose net effect determines for companies the attractiveness of a specific contact, referring back to the attractiveness of a country by measuring the ability to achieve rents, other aspects being equal. Correspondingly, Khanna and Palepu (1997) explain how the environment an organisation is operating in influences the breadth of its activities. Focusing on task environment and its influence on firm’s economic performance, Aldrich (2008) discovered six dimensions of organisational environment: stability, capacity, homogeneity, turbulence, consensus and concentration. Using these dimensions as a fundamental basis, subsequent research clustered these attributes within three

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central dimensions to simplify the environment description. The first dimension is defined as complexity describing the range of skills, information-processing capabilities and knowledge that managers need to operate successfully. The second dimension was described as dynamism, involving the instability or unpredictability of a particular environment. Finally, the third dimension focuses on munificence, defining the extent to which an environment can support and sustain growth (Dess and Beard, 1984; Dess and Rasheed, 1991). These dimensions influence management’s observation of uncertainty and as such affect strategic decisions characterised as the propensity for futurity, risk-taking, defensiveness and proactiveness (Miller and Friesen, 1982). Therefore, it is acknowledged that the fit between strategic orientations and environmental dimensions lead to better firm performance

(Venkatraman and Prescott, 1990). Wu and Lin (2010) highlight specifically the first two dimensions: complexity and dynamism, arguing that companies exploiting activities with higher complexity demand a higher share of managerial skills and attention compared to those involving rather simple processes. Especially, the dimension of complexity was identified as important and different researchers offer different definitions and approaches to discover its impact the organisation: For instance, following Child (1972) environmental complexity can be described as heterogenic, exploiting a variety of activities that are greatly relevant to an organisation’s operations. Furthermore, Duncan (1972) tried to accurately operationalise a complexity construct10, and concludes that his findings support preceding literature, leading to an understanding that the key components of environment responsible for its complexity are customers, suppliers, technology, competitors and socio-cultural factors. This is picked up and described by Sharfman and Dean(1991: 681) when discussing environments:

“Neither a single set of constructs nor a single set of measures of the organizational environment is widely accepted, making it difficult to build a comprehensive literature on the impact of the environment on the firm.... Because neither a single approach to conceptualizing the environment nor to measuring it has received widespread acceptance, we have been unable to build a comprehensive, coherent literature about the environment and its impact on the firm”.

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To summarise, this chapter introduced the important variables of this research: firm’s international experience, its external environment and firm’s economic performance and highlight their interrelation. Table 1 reviews a selection of theories and concepts, which are particularly of interest for this research paper.

3. Research Methodology

The present study may be best described as theory elaboration (Lee, Miychell and Sablynski, 1999), elaborating theoretical links, which have not been addressed in literature. Therefore, the approach of this study is an inductive and qualitative one, as the researcher aims at understanding a complex interrelationship between the variables of a firm’s international experience, its external environment and its economic performance, within the context of internationalisation. Consequently, this research is searching for happenings, to explore the relationship of the variables under study and not as the quantitative approach would suggest for explanation and control (Stake, 1995), and hence the nature of this research is exploratory.

A case is selected as it is particularly suitable for illuminating and extending relationships and logic among constructs (Eisenhardt and Graebner, 2007). As the study aims at building a new theory by answering the introduced research questions, the researcher will use an instrumental case study technique (instead of an intrinsic case study), to allow a general understanding (Stake, 1995) and hence, as stated by Eisenhardt and Greabner (2007)

single case research typically exploits opportunities to explore a significant phenomenon.

economic performance (Gilbert, 2005). Overall, by using this method a close correspondence between data and theory becomes possible and within this process the emergent theory is grounded in the observed data (Eisenhardt, 1989; Glaser and Strauss, 1967).

3.1.

Research Setting

The primary unit of the analysis was the case study of the firm Hardy. Hardy was chosen as a suitable case study as it represents a small-medium sized company, which is operating internationally for more than three years. By focusing solely on Hardy as a case firm, it also allowed the research to focus specifically on the sport fishing industry to be able to control for extraneous variations (Eisnhardt, 1989). To allow a more generalizable outcome of this study, further research was conducted within the UKTI, to view the case study within a wider context of the topic. Additionally, this study was complied with Newcastle University Business School’s Code of Good Practice in Research.

3.1.1. Hardy – Organisational Overview

Hardy is one of the oldest sport fishing companies in the world and specialises on the disciplines of coarse- and fly-fishing, with revenues of more than £12 million per annum. Overall, Hardy represents three brands, Hardy, Grey’s and Chub, which are available nearly all over the world. William Hardy and his brother John James Hardy established Hardy in 1872. Starting off as a ‘gunsmiths, whitesmiths and cutlers’ the brothers entered the fishing industry in 1874 and remained a family business until 1967 when it was bought by the Harris and Sheldon group. In 1985 the organisation was renamed House of Hardy Limited, followed by a further change to Hardy and Grey’s Ltd. in 2004 when Hardy purchased its rival established by one of its former employees (Hardy, 2012).

3.1.2. Hardy’s Internationalisation Process

development and the US as a planned development. Germany represented a strategic important location within Europe and was viewed by the organisation as a hub, which could also serve the other countries in central Europe; Hardy had the opportunity to take over one of its distributers, and was able to enter the market through an already established network. The US fishing market is the biggest sport fishing market in the world and therefore offers great growth opportunities. To date, internationalisation remains successful; the company increased its turnover from about £200,000 in each country up to about £2,000,000 respectively, generating a growth within the firm of 40% (Hardy Interviews).

3.1.3. The Fishing Industry

In developed countries the fishing industry is steady or rather declining due to the latest economic developments, however, within the so-called BRIC countries11 the industry remains growing. According to David Guest12, the fishing industry is under pressure from “all different angles”. The main issues are identified to be government regulations and animal-rights groups, and the decrease of youngster participation in outdoor sports. The fishing industry is described as very traditional and almost old fashioned when referring back to distribution and pricing policies. However, distribution within the US is considered as modern and as the US remains the biggest fishing market in the world it will push further developments within this area. Broadly, the fishing industry can be split into two main categories: capital equipment specialised on hardware such as rods or reels, and the software equipment, so-called consumer-balls. The great breadth of products offered within this market can be directly related back to the type of water people fish in. The industry offers equipment for fishing in fresh water, still waters such as lakes, running waters such as rivers and the sea. Within this, there are broadly five fishing types recognised such as fly-fishing, carp, coarse, predator and sea fishing (Hardy Interviews).

3.1.4. UK Trade and Investment

The UKTI is an organisation, which supports companies while internationalising. To do so successfully, the UKTI works with different development programs to help an organisation to define its current situation and to outline future development to enhance successful internationalisation. Within these programs UKTI focuses on the different stages a company can find itself in, and in which every firm faces different issues (UKTI, 2012).

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3.2.

Data Sources

Data were collected from two main sources: open-ended interviews and archival documents. Table 2 summarises afore introduced sources:

Table 2: Research Sources

3.2.1. Informants

The study follows Eisenhardt and Graebner’s (2007) advice, that informants shall involve organisational actors from different hierarchical levels, groups, functional areas and geographies, as well as informants from outside observers and other relevant companies. In line with this, this study engaged individuals from Hardy and the UKTI with a broad range of different responsibilities interfacing with the internationalisation process of SMEs. All informants were actively trying to spot opportunities and deal with issues related to the three key variables of this study. All informants were aware of the important role a firm’s international experience, its external environment and its economic performance has in the life of a company and recognised at least some kind of relationship between the variables.

3.2.2. Interviews

As interviews are considered a highly efficient way to collect rich, empirical data, the analysis is mainly based on seven in-depth, semi-structured interviews conducted by the researcher. The participants were selected as informants with regards to their role within the organisation and willingness to participate. Highly knowledgeable informants are a key approach; through their involvement in various business situations they can view the crucial phenomena from more diverse perspectives (Eisenhardt and Graebner, 2007). Consequently,

Company Informant Initial Archival documents

Number Duration

Hardy Operations and HR director DD 1 55min Industry documents

Commercial and Marketing director UK KB 1 60 min Branch surveys

Finance director IB 1 35 min

President Hardy NA JM 1 48 min

General Manger HACL CB 1 50 min

General Manager Hardy Clothing TT 1 45 min

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UKTI International Trade Advisor GY 1 55 min SME internationalisation

SUM 7 348 min Market growth development reports

eligibility criteria required individuals to at least be involved in SMEs internationalisation processes, providing rich information concerning the topics covered by the interview schedule (see Appendix II). Prior to commencing the interviews, participants were informed that data was treated confidentially and were asked to sign a consent form for being interviewed and audiotaped (see Appendix III). The information obtained was kept strictly confidential under the Data Protection Act 1998 (OPSI, 2010). Five interviews were conducted in-person, and two interviews were conducted via Skype. All interviews lasted between 35 and 60 minutes, the interview duration was on average 49.71 minutes. Each of the interviews was fully transcribed; a sample of the interview design can be viewed in

Appendix IV. Research used a semi-structured interview schedule, concerned with the

question why does international experience influence a firm’s environment and how does a firm’s international experience affect its environment, and why can a firm’s environment influence a firm’s economic performance, and how do external factors affect firm performance. Participants were asked 26 questions each, which were organised in five themes: Firstly, the researcher was interested in Hardy’s overall internationalisation process, secondly the questions focused on the overall topic of organisational environment, and Hardy’s external environment in particular. Fourthly, participants were asked about Hardy’s international experience and how it may influence its environment, and lastly the questions focused on the relationship between Hardy’s external environmental factors and its economic performance. To prevent the investigator from influencing both the participant and the interview’s direction through interpretations and closed questions, the interview schedule was adapted to the specific circumstances of every interview (Carson, 2001; Kvale, 1996). However, within the interview process, the researcher experienced difficulties to keep the participants focused on the crucial topics; this was particularly due to the participant’s position within the organisation and the participant’s interest in his or her area of work, which was not always directly related to the research topic. To overcome this issue the interviewer used different sub questions related to the research theme to bring the participant back on track. Interviews were conducted in the interviewee’s chosen location, to make each interviewee feel most comfortable (Kvale, 1996).

Clarke, 2006)13. Using simple orthographic notation, the audio material was transcribed accurately. Afterwards, the interviews were further summarised with respect to the four research questions of this study. From these summaries initial codes were systematically generated. Subsequently, the codes were related and collated to each other and to their relevance with respect to the derivation of themes. Following Braun and Clarke’s (2006) advice, the researcher paid close attention to the fact that data within the themes remained homogenous, while distinctions among themes were identifiable and clear. Once data was analysed the themes were assembled in groups to control for emerging patterns. Using an inductive approach to conduct the analysis and to interpret the findings, the development of propositions and the theory building was proposed and suggested by the data in a bottom-up style. Research provides direct quotes to every thematic headline within the analytical chapter of this research to allow an optimal illustration of the type of data categorised by the single themes (Breakwell, 2006).

3.2.3. Archival Documents

A total of eight archival documents were obtained from Hardy, and accessed through the UKTI homepage, as well as received from UKTI staff. Data included fishing industry and branch documents and surveys, as well as UKTI studies, which broadly covered the topics of SME internationalisation, market growth development reports and business surveys. These documents constituted a valuable primary source of data and also offered in part a method to crosscheck the interviews and to control for retrospective bias. Research focused on documents discussing SME internationalisation processes with its main focus on the relationship between international experience, environment and economic performance.

3.2.4. Research Summary

To visualise and give a brief synopsis of the framework this research is built upon, Table 3 presents a summary of the complete research process following Eisenhardt’s (1989) recommendations, highlighting the single steps the researcher passed while conducting the apparent study.

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4. Analysis of Data

“Analysing data is at the heart of building theory from case study”

(Eisenhardt, 1989: 539)

The following chapter of data analysis introduces the different themes derived from the interviews, which can be related to the three variables, firm’s international experience, its external environment and its economic performance. The analysis of the field research showed that indeed international experience of a firm can influence directly on its external environment, and further that a company’s external environment can also have a direct influence on its economic performance. Data will be presented in a narrative way, interspersed with quotations from key informants along with other supportive evidence. The researcher will already intertwine the case story with relevant theory to demonstrate the close connection between emergent theory and empirical evidence (Eisenhardt and Graebner, 2007). Following Eisenhardt and Graebner’s (2007) suggestions, the investigator will ensure by intertwining evidence and theory that both are at the forefront of the paper.

The themes discovered are best illustrated by presenting them related to each research question of this study, since this will ensure that the research stays focused and reaches its goal to answer the introduced research question applicably. The most prominent theme identified to answer research question 1 is firm’s learning process. Research question 2 can be best answered by using the forces of (a) people management and (b) product development. To examine research question 3, the study exploits the theme of firm’s external factors and

setting, to fully capture the depth of this occurrence. Lastly, the forces of (a) competitor behaviour, (b) customer perception, (c) environmental forces, (d) economic development and

(e) political development fit best for research question 4.

4.1.

Why does a firm’s international experience influence

its external environment?

The field analysis confirmed that there is an explanation for why the international experience of a firm can influence its external environment. To explore this in more detail and highlight the reasons for this occurrence, research will examine the force of ‘firm’s learning process’. Table 4 summarises this data.

Firm’s Learning Process.

Organisational learning plays a key role in a firm’s behaviour and future development

(Luo and Peng, 1999). In recent years, literature examined company’s learning capabilities as

the major sources to achieve competitive advantage (Barney, 1991). Research data clearly stresses the importance of organisational learning within a firm’s development to enable a business to successfully manage environmental issues, embedded in organisation’s internationalisation context. For instance, Tsang (1999) argues that learning while internationalising takes time, as the firm has to digest and absorb the lessons learned from experience, and further Levintal and March (1993: 95) state that “learning has to cope with confusing experience”, particularly in differing environments.

Consequently, for Hardy it is important to learn from experience, to continue internationalisation successfully. The external environment a firm is embedded in presents different opportunities as well as issues to the organisation and those can vary greatly among countries. By building up international experience, a company learns how to deal with different environmental settings and discovers solutions to solve issues related to external factors, to gain competitive advantage. Informant TT described this process as “an on-going learning curve, our own people out there are learning what works for us.” Concluding that the firm has “to get better all the time and if you’re not, then you’re obviously failing, you’re not going to get everything right all the time, there will be mistakes made, (…) [the firm has to find] a way of handling things which go wrong and more and more you’re getting it right, (…) getting it right in a better way, that just takes time.” In line with this argumentation,

contends, “Every time we do something again, we should do it better than the last time”

(Prokesch, 1997).

Putting this directly in context of learning about external factors such as the firm’s customers, TT argues a key aspect is to learn “about how consumers perceive our brands”, especially when starting to export to different host countries, highlighting that “you need time to gain experience and you can’t sort of short cut that, if you are a new brand in a market, in a new market, nobody got any experience to that particular scenario, so you can’t fast-track that, everyone has to take their time to learn and listen and adapt to what’s going on”. In accordance, Craig and Douglas (1996) research observes that success in international markets can be directly related to a firm's ability to learn by proactively pursuing knowledge about international markets, potential competitors and customers, and issues of operation management in unfamiliar, distant environments. Considering that Hardy’s step was only recently made from being an international traded brand to an internationally present company, with subsidiaries in Germany and the US, DD adds on that “hopefully you learn from your mistakes and you don’t repeat them, I think we’re still in the process of learning how to deal with it, almost every month there is something that pops out that is somehow unique to a certain market”. Accordingly, KB links experience in the host country directly to experienced staff, who have host market familiarity and from whose knowledge the company can profit directly when starting to trade within this country: “It is really critical for us to really understand what true market opportunity is by country, (…) if you go into other countries, then employ experienced nationals in that country, cause you’ve got a much better chance of getting it right in the first place”. Alongside, DD also describes this process of learning through individuals’ experience by stating that the company was able “to build both operations around individuals that we felt knew the industry, knew the specific market, have a certain amount of experience and certain business accuracy”. This examination clearly shows that international experience gained when internationalising influences the way a company is able to deal with issues related to external factors, particularly the ability to learn from mistakes and the use of experienced members of staff help to do so. As Hardy “certainly learned when [they] set Germany up. We felt very strongly that the model we followed had been successful, that’s why we replicated it in the US” as KB concludes.

internal issues. Most prominent issues were regulation and tax laws and as well trade restrictions and currency differences. This is a good example to examine Hardy’s learning process as the company actively tried to learn from former mistakes as stated by DD: “I looked at the history of Hardy in the US, which was quite tricky, different distributers, they tried to set up on their own on two occasions and hadn’t worked, and I tried to learn from some of those mistakes.” Here again, personal experience in the market was crucial to overcome environmental issues as JM points out by naming an example related to individuals experience: “[Our] managing director, he had actually worked in the US, was familiar with American standards, of opportunities and basically knew how to set an up a real business” and Hardy accumulated knowledge gained through its former failures and individuals international experience to explicitly overcome environmental issues, supporting the upper-echelon perspective (Hambrick and Manson, 1984). According to GY, external factors can also be described as a barrier to a certain host country. He confirms that these issues are not unique to the case firm but hold true for organisations, who aim at internationalisation in general. Hence, GY acknowledges two forms of barriers: emotionally and rationally controlled external factors. He argues that emotionally controlled factors bear more risk for the business than the rational ones as they are perceived as harder to calculate, therefore an environment which is rather linked to human emotion, tends to lead to more uncontrolled and unexpected business situations. Johanson and Vahlne (2009) distinct between an affective and emotional dimension within the relationship under study, highlighting their importance particularly in the context of knowledge acquisition. In sum, they conclude by referring back to trust as a crucial ingredient for successful learning, in order to gain and develop new knowledge. Overall, as reasoned by JM, there are “two sets of [environmental] conditions”, conditions where you “can do things about and the things you can’t do anything about, there is a constant battle as you work through to make the things you can’t do something about into things you can do something about, so as the market changes (…) it’s really become more important to be able to change and respond” in order to succeed. Hence, there are external factors, which cannot be influenced by the firm’s international experience proactively; the company can only react to them. However, other external factors can be influenced, and hence, this occurrence can be summarised in this research’s first proposition.

Proposition 1:

4.2.

How does a firm’s international experience influence

its external environment?

As research clearly explained why firm’s international experience can influence on the external environment of a firm, the aim is now to fully highlight how this occurrence takes place. The study explored the incidence of how the international experience of a company can influence its external environment by examining the themes of ‘people management’ and ‘product development’. Data is summarised in Table 5.

People Management.

In line, KB states about Hardy’s key employees: “They are almost intangible, they’re experienced in the market and very well respected”. When Hardy set up the German subsidiary they took over one of their distributers, accessing the market from an advanced position using the distributer’s experience to access supplier networks, a customer base and knowledge about the German market: “Buying out the distributer, we were able to not start from scratch, (…) we already had a customer base which we could start using straight away, which was an advantage” (KB). Furthermore, DD recognises “in Germany because we had a start, we had a dealer and we got straight into, however the interesting point is that in Germany we thought we knew the market. Then when we got German nationals in there, we realised we knew nothing about it at all”, showing how important international experience for a SME is, to operate successfully in a new environment – “German nationals and they worked in the fishing tackle industry for most of their lives, they knew all the issues we’d come across, and they gave us a ‘leg-up’” (KB). The strategy of “building the business around the right people” (DD) also played an important role when setting up the second, the US subsidiary: “We really followed a very similar model in the US, (…) we feel, vital to the success of starting a business in another country is employing nationals from that country to manage it” (KB) and Hardy “found somebody who had experienced the market and industry, (…) he had experience with running small US fly companies, which were new to the market” using an individual’s experience to achieve international success, pointed out by IB. The informants particularly highlight the importance of market knowledge and experience in the US context, as Hardy experienced failures due to external factors which lay beyond their influence such as “currency and trade restrictions” (JM) but also within their reach because of employing the “wrong person” (JM) and about the US market such as underestimating the competitiveness of the largest fishing market by not adapting to market conditions. The participants greatly stressed the importance of individuals, experienced in the host market to feed the HQ with international experience.

the dynamics of their subsidiary’s environment and subsequently identify opportunities by making connections between “prior knowledge and experience and developments in the external environment without being biased toward a context where prior knowledge and experience are entrenched” (Muzychenko, 2008: 367). Consequently, the first proposition to answer research question 2 is formulated accordingly:

Proposition 2a:

Firm’s international experience can directly influence its external environment, by employing internationally experienced people in key positions.

Product Development.

To successfully enter foreign markets and to establish subsidiaries, companies need the right product range to reach and satisfy customer needs as KB points out: “A thing that held back the internationalisation of our business is the fit of the product to the market, because when you first get into fishing you think that the markets are quite similar, but in the reality they are very, very different”. Due to the fact that Hardy only recently started to increase its international operations, it becomes obvious where it struggled: “Even though we had distributers all around the world, only a small amount of what we were producing was really suitable for these markets” (KB). Nevertheless, Hardy was able to use its distributer network and their experience to meet market requirements, and succeed within this highly competitive market, as further expressed by TT: “We really had to spend a lot of time on gaining experience with the competition in these other markets, the brands that we’re up against and also learning about like the kind of fishing that people do, and how they’re fishing and what they need to do that with, and what they are prepared to buy”. Additionally, “product development was done in the centre (HQ); it was done with a UK bias, so we had to get the people travel out and get to spend time in these local markets, to understand how people fish in Germany, how they do fishing in the US” (DD).

has its fundament in the interaction of partners; building up knowledge with trust alongside, and due to trust partners commit themselves further to this relationship. Relating literature to the context of Hardy, Hardy has to use its experienced key employees in order to develop a new product, which offers a competitive advantage through networks. “It was a friend of mine, who used to work with me in my previous company, he is a scientist and he found this material that solved the problem that we had worked on before (…) so our engineer from the UK called him up and was able to really engineer a solution to the problems that people were having when applying this technology (…) and was incredible successful in doing so” (JM) and further “[with the new material] we were happy to try and because we’ve got a long history of development and innovation, we could make a much more responsive, lighter, better rod (…). So all of a sudden we were in, and at one point we could have sold three for every one we had. (…) The point is that we had that ‘hello’ product. And then instead having to go to people and say will you have Hardy, we had people coming to us. And what we had done, we had differentiated ourselves, a unique product” (CB). Product is key in the fishing industry as KB explains: “What you find with fishing tackle is because of technology, and the ability of the far-east to manufacture to a good standard. Because of this there is very little poor fishing tackle on the market, there is an awful lot which is good quality, some which is excellent, but there is very, very little which gets to market that’s really poor. So it becomes more difficult to differentiate yourself against competitors. (…) The performance of brand is very, very important, people’s perception and recognition of the environment is very important.” This shows how important the network of one individual is for a company’s further business success, and how the individuals experience enhanced the firm to outperform external factors by simply delivering a unique product: “The Syntrix rod material, we were in the right place at the right time in the right market space, and that really did catch the imagination of the US market we tailed a rand consumer, taken the perception of the Hardy brand to a completely different level and different type of customer” (KB).

In order to also answer research question 2, this study presents its next proposition in the following manner:

Proposition 2b:

4.3.

Why does a firm’s external environment influence its

economic performance?

Once again, field analysis confirmed that there is also an explanation for why a company’s external environment can directly influence it economic performance, to investigate this subject the study will examine the force of firm’s external factors and settings. Interview data is summarised in Table 6.

Firm’s External Factors and Settings.

A firm’s external factors influence its performance, as it represents the environment the organisation is embedded in. Literature, suggests that local environment along with country differences can directly influence subsidiary success (Luo and Peng, 1999; Uhlenbruck, 2004). Important to consider is that the environment around a company changes over time (Levinthal and March, 1993). As a result, organisations need an adaptive selection with a conduct adjustment in order to accompany internal settings to external context, by constructing new routines (Nelson and Winter, 1982). Moreover, developed strategies may not be able to solve arising environmental issues as “unfamiliarity with the host country environment magnifies difficulties in collecting, interpreting, and organizing the information necessary by a foreign subsidiary, and increases the relative costs of foreign investment” (Wu and Li, 2009: 1303).

(Tackle Trade World Magazine, 2012), which will directly influence Australian’s fishing

market, numbers of fishers will decline and so will organisations’ performance. Accordingly, to answer research question 3, the following proposition is presented:

Proposition 3:

Table 6: Summary - 'Why' External Environment influences Economic Performance

Theme Reasons 'Why' Participant Example

“Because of the bad economy developments "The economy went down."

KB “Awful weather.”

"The market changes as much as it has over the last few years, it’s really become more important to be able to change and

responded, both with programs, products and with merchandising and marketing, you can’t stand still because when you lose 40% of the value of wall street and you have a couple of things going on, such as political changes, unemployment which is very high, it’s just not like it was in 2004 or 2005, so the external conditions,

particularly the economy and the political conditions, have definitely changed everything, and definitely influenced performance."

"I always think that your market presents its unique opportunities, to be able to move quickly from one opportunity to another as conditions change."

Tackle Trade World Magazine

Laws and regulation set targets within the fishing industry. Why does External

Environment influence upon Economic Performance Firm’s External Factors and Setting

Relationship between Firm’s External Environment and its Economic Performance

Environment

4.4.

How does a firm’s external environment influence its

economic performance?

Next, this analysis examines how the external environment of an organisation influences, to a certain extent directly on its own economic performance; results are further highlighted by examining the themes of (a) competitor behaviour, (b) customer perception, (c) environmental forces, (d) economic development and (e) of political developments. Table 7 summarises the research data.

Competitor Behaviour.

“Competitiveness is only a means to an end, that is, the firm’s performance” (Man, Lau and Chan, 2002: 130), hence, being competitive and succeed against your competitors can be directly related back to firm’s performance. Being competitive includes various disciplines such as gaining competitive advantage or price competitiveness perspective

(Waheeduzzaman and Ryans, 1996); hence, competitiveness is directly linked to performance

(Man, Lau and Chan, 2002).

are moving in as they want to look for other areas. What is affecting us is that companies like ‘sports direct’, they want to move into fishing, so they [just] bought some fishing companies.” The effects of these trends on Hardy’s performance are even further supported by the overall stagnation and rather declining developments within the fishing market in the Western countries, pointed out by KB: “We are all reacting to each other because other than a few areas in the world, the fishing tackle market is either stable or declining. So it’s really a game of taking market share off each other. (…) If you look at the mature areas, and that is where we principally operate in, they’re either flat or declining” – which even further increases competitor density. Subsequently, research presents following proposition in order to answer research question 4:

Preposition 4a:

Firm’s external environment can directly influence its economic performance due to the fact that competitors’ behaviour changes in a proactive or reactive manner.

Customer Perception.

better organised, well informed and more demanding compared to former days (Ruekert, 1992). Nevertheless, the industry a company is operating in is important, but also the individual market place itself as customer preferences and expectations vary across the globe. A good example JM gave, when talking about clients’ customer service expectations: “Your company is differentiated by the quality of the customer service, in times of difficulty the importance of customer service rises, peoples’ lives suck, (…) particularly the US customer service normally is, which is already lots better than any customer service in Europe, we couldn’t survive with those in the States at all, this is where we have priorities here and differentiate companies, and companies make significant investments in the customer service in terms of clustering the customer, they already build it into their business plan.” Literature agrees with aforementioned example, stating that firms exploit specific activities to improve its service strategy to uphold and cultivate a customer orientation within the company. This customer orientation became fundamental in the business’s policy and philosophy, considering the fulfilment of customer needs as the firm’s purpose to maximise business profits. Indeed, Drucker (2007) asserted that the only justifiable explanation of business purpose is the satisfaction of customer’s needs.

However, unrelated to consumer perception and demand, Hardy also faces issues related to customer loss, because of economic developments and environmental forces, indicated by KB: “We’ve seen over the last three and four years that the market has been declining, we also seen that by the number of licences14 which are hold, (…) those are down 15% this year, and they are down principally for two reasons, first of all the economic downturn and secondly it’s weather”, and further adds on that overall the “foot fall of people going fishing on average is down 25%, (…) and it’s definitely affected by these external factors.” As a result, this study presents the second proposition addressing research question 4 as follows:

Preposition 4b:

Firm’s external environment can directly influence its economic performance due to the fact that customer and consumer perceptions increase or decrease.

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