Chapter 1. Introduction

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Kaemingk goes to Poland

Or: How to successfully expand abroad

Author: Wendy Wesselink

Date: 27^th January 2004 Supervisor Kaemingk: Drs. S. Temmink

First supervisor RuG: Drs. M.P. van der Steen Second supervisor RuG: Ir. P. Henrich

Institute: Rijksuniversiteit Groningen Faculteit Bedrijfskunde Landleven 5

9700 AV Groningen

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Preface

When I started my study at the University of Groningen, I knew that this would have to be ended with doing research within an organisational context. That this would be as interesting as it turned out to be, I never could have imagined. At the beginning of my research for Kaemingk, the ‘problem’ they had was rather broad: they wanted to expand to Poland. After some time it turned out that the real question they had was: “what should we do in order to be successful on the Polish market?” This master thesis will give an answer to that question and all the information needed in order to come to my conclusion. However, this may not only apply to Kaemingk and their desire to expand to the Polish market, it may also turn out to be a useful framework for other companies wanting to expand abroad.

I would like to thank Martijn van der Steen for giving me guidance and advice. He was always willing to answer any question I had and by giving his comments and suggestions he helped me to look more critically at the research.

Sandra Temmink, thank you very much for everything you have done in order to support me during the research. You always took the time to help me whenever I had a question and it was very helpful to discuss some of the, sometimes difficult, issues that arose during the process.

I am Artur Misaczek thankful for helping me with finding information on the Polish market and translating Polish information.

I also would like to thank Mr. van Tol, Mr. De Boer, Mr. Roelofsen and Mr. Warren for the time they gave me to interview them.

The export department, Sandra, Manon, Nancy, Eddy, Patrick, Suzan and Elke, and all the others at Kaemingk, also a big thanks for helping me wherever possible and making me feel ‘at home’.

Finally I would like to thank my parents, Jan-Willem, Anouk, Remko and all family and friends who supported me during the period of doing this research. Thanks for all the interest shown and giving me the space and time to finish it.

Wendy Wesselink January 2004

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Chapter 1. Introduction

1.1 Background

2004, 10 countries will enter the European Union, which are Cyprus, Estonia, Hungary, Lithuania, Latvia , Malta, Poland, Slovenia, Slovakia and the Czech Republic. This means new markets will open with chances for foreign companies to service these markets. Kaemingk also sees an opportunity in one of these markets, namely the Polish market, as this market has a big market potential and can be considered, according to Kaemingk, to be a growth market. However, besides that advantage acknowledged by Kaemingk, Poland has some more advantages like low production costs, human capital (resources and high qualifications) and a good investment climate.

1.2 Kaemingk

The history of Kaemingk BV stretches back over sixty years. The man who gave his name to the company, Mr H.A.J. Kaemingk, started a wholesale business in 1937, selling a variety of household products. In the early 1950s his addition of Christmas articles to the range laid the basis for today’s core business: the sale of seasonal decorations. Over the past twenty years, Kaemingk has grown to become the largest distributor of decorative items in Europe, with over 10,000 different products and a turnover approaching 80 million euros. In 2003, the company’s success resulted in becoming a partner of the American listed company Blyth Inc. Together with Blyth, it is their aim to further grow in Europe and far beyond.

Kaemingk’s collection mainly consists of two parts, the Christmas collection and the Spring Easter collection. The Christmas collection consists of about 8,500 items, which range from Christmas baubles, sets of lights and Christmas trees to candles, candle holders and a special range of products for florist sundries. The Spring Easter collection consists of about 3,500 items. Besides the typical Easter eggs, Easter chickens and Easter hares, various other spring items are offered like Valentines presents, a wide range of floral ceramic and many other seasonal themes, trends and gift items. They sell these products to wholesalers, store chains, builder’s merchants, florists, garden centres, etc.

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Kaemingk’s headquarters and warehouses are located in Aalten, the Netherlands. Their warehouses have a total surface of 38,000 square meters and therefore they are able to store more than 2,200 containers.

Kaemingk has showrooms in Aalten, Grambek (Germany), Oudenaarde (Belgium) and Preston (UK).

Besides these showrooms they are also present at well-known international fairs in Frankfurt (Premiere/Christmas-World and Autumn/Tendence Fair) and Birmingham (N.E.C.). Kaemingk is a member of the European Floral Suppliers Association (EFSA) that includes 24 leading companies which determine, among other things, the EFSA colours for the floral branch.

Kaemingk now wants to expand their activities to the Polish market, eventually in co-operation with the factory they already work with or other (local) companies. As Poland is quite a poor country with a population that is mainly catholic, in first instance this will be mainly concerning the Christmas articles, however also the Spring/ Easter collection will be included.

1.3 The research

From the above one important characteristic of Kaemingk comes forward: Kaemingk is a sales organisation. It does not produce its products and does not work with stock. It is this characteristic that distinguishes Kaemingk from other organisations. It is therefore of importance that during the research these are kept in mind.

Another issue that comes forward are the factors that are of importance for an expansion or internationalisation. From literature about international marketing (Mühlbacher et al 1999) it can be learned that especially three points influence and are influenced by internationalisation: the product, the company and the market. Market should in this case not be seen as a product market, but as a country market, which entails the range of the general environment, the industry and the competitive environment.

The next chapter will deal with the research itself, the objective of the research, the research question, the sub questions and the conceptual model. Also the methodology will be explained. Chapter Three will deal with success. How can success be defined and which definition of success applies most to what Kaemingk expects of the expansion. Chapter Four will introduce different models and theories on internationalisation. Chapter Five will describe the model for internationalisation, which is best suitable for a Kaemingk and other sales organisations. This model will be based on aspects that come forward in the fourth chapter. Chapter Six will describe the current product. This will include the product, distribution, promotion and pricing. The country-market will be described in chapter Seven. Here the general environment, the industry and the competitive element will be dealt with. Chapter Eight will deal with the

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internal characteristics of Kaemingk. First the corporate policy will be handled, second the corporate strategy will be described, third the management systems and finally operations will be dealt with. Chapter Nine will give a conclusion and finally, Chapter Ten will give recommendations in order to make the expansion more successful.

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Chapter 2. The research

The previous chapter has given an introduction in the issue and the company that is the principal of this research. This chapter will deal with the research itself. First the objective of the research, the research question and the subquestions will be dealt with. Second the methodology of the research will be explained, this will include the conceptual model. Finally the method used to research the subject described in the previous chapter will be given. Methodology will in this case be the way along which the research will be done, the method will describe the used instruments.

2.1 The research question

At the beginning of the research, the ‘problem’ of Kaemingk had to be researched through an open question as it was a very broad question: “We would like to go to Poland, what should we do?”. However, as the research proceeded it became clear that the question could be more defined. It became clear that usually in such a topic (an expansion) three major elements are of importance: the product, the company and the market. Therefore it was possible to narrow the open question down to a more closed question. A suitable research question then has been formulated. Throughout the whole research this question has been kept in mind. The answer to this research question will consist of some well-founded conclusions and based on these, recommendations can be made that contribute to the solution of the ‘problem’.

Objective

To investigate the possibility of successfully expanding Kaemingk ’s activities to Poland.

Research question

What does Kaemingk have to do in order to realise a successful expansion to Poland?

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In the research question the term “successful” is very important. It appeared however that in most theories this term is used, but not (clearly) defined. Therefore one of the sub questions will deal with defining success.

Gradually it appeared that no suitable model existed for the question Kaemingk had, or better formulated, no model existed that is well suitable for a company with Kaemingk’s characteristics, as most literature deals with models aimed at companies that produce. Therefore the decision was made to develop a model that Kaemingk and companies with Kaemingk’s characteristics could use for an expansion abroad. This decision led to a sub-question about a best useful model.

Sub questions

• How can success be defined in this case?

• Which models exist for internationalisation and what should a model for expansion by a company with Kaemingk’s characteristics look like.

• What are the product characteristics and are they, in accordance with the chosen model, suitable for a successful expansion?

• What are the market characteristics and are they, in accordance with the chosen model, suitable for a successful expansion?

• What are Kaemingk’s internal characteristics and are they, in accordance with the chosen model, suitable for a successful expansion?

• What conclusion can be drawn based on the characteristics above considering an expansion abroad?

• Which recommendations can be made concerning, the product characteristics, market characteristics and Kaemingk’s internal characteristics in order to make the expansion more successful?

Considering each company, product and market has its own characteristics, a model will be chosen in which these variables can be filled in. This makes it not only appropriate for Kaemingk, but should make it appropriate for other non-producing companies.

The context in which this research occurs is the entry of Poland to the European Union, which results in opening up the Polish market with more opportunities for foreign companies. The context is therefore important as it determines the market to be entered; a country not joining the EU probably would not have been entered.

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2.2 Methodology (Conceptual Model)

The starting point of this research is the literature with the different models and theories of internationalisation. From these theories, some definitions of success will come forward, from which one will be chosen in consultation with Kaemingk. By describing the definitions of success and choosing one of them it is possible to make recommendations that are well founded by literature and are acknowledged by the company. The chosen definition will be kept in mind during the research, especially during developing the best useful model (chapter Five) and the recommendations. Chapter Five will describe a best useful model which will be developed based on the different existing models and theories explained in Chapter Four. Based on this model, the three variables, the product, the market and the company will be described. This will be some blanks exercise; the information about the variables will be filled in the blanks of a checklist in accordance with the best useful model, which will lead to the conclusion. The recommendations will then give some guidelines for Kaemingk on how to make the expansion even more successful than the situation that comes forward from the conclusion.

Figure 2.3 Conceptual model

Chapter 9 Models & theories of

internationalisation

Best useful model

Recommendations

Definition of Success Conclusion

What does Kaemingk have to do in order to realise a successful

expansion to Poland?

Company: Kaemingk

Product: Christmas collection

Market: Poland

Chapter 10 Chapter 6 Chapter 7 Chapter 8

Chapter 4

Chapter 3 Chapter 5

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2.3 Method

2.3.1 The role of theory

Before starting with the research, some assumptions were made. These assumptions involve the importance of following elements: product, market, and internal characteristics of the company and were made based on literature of Mühlbacher, et al (1999).

Theory also played a major role at concretising of the concept of success. This concept is used by many authors, however only few of them explained what a successful expansion should entail. After some research it appeared that different definitions for success exist. In order to make the concept operational, these definitions were presented to Kaemingk and the best fitting definition was chosen.

Development of knowledge was most certainly important, however it was not the main focus of the research. It was important to gain knowledge in order to develop the new model, however the development and the filling-in of the model in order to come to a conclusion was more important. The theory is in this case especially used as a good basis for designing the new model and the checklist.

Theory was important and led to insights in the different aspects concerning expansion. However no sound theory could be found. Therefore a new model, based on existing theory was developed. This model is then build on that theory.

Based on the model a checklist was made that was used during the research for the market information, and the interviews about the product and the company characteristics.

2.3.2 The outcome of the research

The outcome of this research can be divided into two steps. The first goal is the development of a best useful model for Kaemingk and companies with Kaemingk’s characteristics. This model will then be used to analyse the current situation and deriving to a conclusion considering Kaemingk’s expansion to Poland.

This is the second goal of this research: advising, considering the current situation, what is the best way for Kaemingk to expand and giving recommendations about what Kaemingk should do in order to make the expansion more successful. During this phase and especially when giving recommendations, the chosen definition of success will be kept in mind. When the model is used by another company with a different definition of success, this definition has to be taken into consideration when using the model and giving the recommendations.

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2.3.3 Data

For collecting the needed data different methods will be used. First of all desk research will be used to collect data about the definitions of success, and the different theories on internationalisation. Information about the Polish market will also be collected through desk research, in combination with observation, which will occur during the Christmas Fair in Poland and a trip of 4 days through Poland. During this trip the goal is to find out what Christmas is in Poland, what kind of products are sold in stores, prices, colours, etc. Also some already existing customers will be visited. Observation also found place in examining the internal characteristics. By being at the company some information was obtained which probably would not have been obtained during interviews or surveys. As information about the internal characteristics was sometime quite hard to understand, it was more understandable as it was possible to actually see what was going on. This all made it possible to get a ‘feeling’ of the company.

As already said most data was obtained through desk research. Information on the different theories on internationalisation was obtained from journals, literature, etc. From this, a whole range of theories came forward. In most of them however, the authors referred to a few other theories. Those theories that came back most often in the other theories have been used to gain insight in the topic of internationalisation and to learn about those aspects that are of importance when considering an expansion. The information used to describe the three elements product, company and market has been obtained from literature about international marketing, in this case Mühlbacher et al (1999). Information on Poland was mostly obtained from the report of UNIDO, the United Nations Industrial Development Organisation in Warsaw, and through the web site of the EVD, Economische VoorlichtingsDienst, a governmental organ. These two organisations were considered to be most reliable.

Information about Kaemingk and their collection was obtained through observation and interviews with the relevant employees. Interviews were conducted by a topic list in order to prevent from forgetting important issues. Furthermore, I asked at the end of each interview whether the interviewee thought I had forgotten something or whether he or she would like to commend on something. This also brought some interesting information forward. The topic lists used for the interviews can be found in appendix I.

2.3.4 Data analysis

The analysis of the data from the interviews was conducted in 5 phases, which will be explained below.

During the analysis of the data received from the interviews, the research question has been kept in mind all the time, this in order to make sure that the conclusion drawn will truly reflect the phenomenon researched.

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The first reduction phase: the writing of a record and deleting irrelevant information.

First the text of the interview was written down right after the interview. After having typed it out, the complete text was read thoroughly and all irrelevant information was deleted from the file. In order to make sure that information, that seemed irrelevant in the beginning, but later on turns out to be relevant, is not deleted completely, this information was recorded in a separate file.

The second reduction phase; classifying the information in fragments and roughly labelling these fragments.

After having deleted all the irrelevant information, the text was classified in fragments. The different fragments were given a different label, which reflected as much as possible the list of topics made for the interviews and the checklist made in chapter Five.

The third reduction and first abstraction phase: reducing and classifying the labels.

During this phase the labels were arranged and labels that overlapped were joined together. Specific labels that were all a bit different, however in core similar, were put together in core labels.

The second abstraction phase: coming to concepts

Here the core labels were defined in order to make them understandable not only for the researcher, but also for the reader.

The third abstraction phase: finding an explanation

After having defined the core labels, the blanks of the model were filled in with the information obtained from the interviews. This lead to the conclusion about the product, market and the internal characteristics.

2.3.5 Evaluation of the research

During the research I was accountable to drs. M. van der Steen of the University of Groningen and drs. S.

Temmink who was my supervisor at Kaemingk. To drs. van der Steen I was especially liable concerning the choices that were made, or making the research proceedings more explicit. To drs. Temmink I was especially accountable concerning the outcomes and the used data about Kaemingk and the product.

Important for this are the research questions and the conceptual model. Furthermore will be examined whether the choices that were made during the research were sufficiently founded.

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Limitations

The fact that no such thing exists as THE Christmas industry and the fact that Kaemingk has different client groups made it very difficult to find information about the industry. And the fact that the retail market is quite split up, made it even harder. Another issue is that in Poland information is not as well documented as in for example the Netherlands, this made it not always possible to find the desired information. As time was limited, it was not possible to obtain all information that was desired.

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Chapter 3. Success

A lot has been written about internationalisation and how to successfully expand abroad. However it is not always clear when the expansion of a company can be considered successful and how this success can be measured. Often success is used as a standard variable, however mostly no clear explanation of success is given. This seems very curious as from the few authors that do explain success it occurs that different explanations can be found. Therefore this chapter will deal with success. In the Cambridge International Dictionary of English ‘success’ is defined as “the achieving of desired results” (p.1454). It is then the question what these desired results are. This chapter will proceed with definitions of success or the desired results of an expansion given in literature. Based on that literature some definitions will be formulated, which will be presented to Kaemingk. The for them best suitable definition will then be used to work with.

Mühlbacher, Dahringer and Leihs (1999) give four stimuli for internationalisation. These stimuli are limited growth in domestic markets, technological change, global competition and access to resources. Most of these are nothing more but stimuli, however one can be seen as a goal of internationalisation. Limited growth in domestic markets can be the reason why a company expands abroad. This is mainly the case when a company has, due to severe competition in the home country, or limited financial resources, production capacities or technological know-how, no possibility to grow through additions to the existing product line. The most viable way to expand could be to enter less saturated foreign markets. This will lead to the desire to gain market share in the new to serve market.

According to Anderson and Gatignon, the impact of entry modes on the success of foreign operations is great, and therefore entry modes can be identified as a ‘frontier issue’ in international marketing. Their definition of success is therefore mainly concerned with foreign entry modes, however could also be seen in a more general context. According to them a manager should weigh trade-offs to arrive at a choice that

“maximises risk-adjusted long-run return on its investment” (Anderson and Gatignon 1986, p. 2).

Driscoll and Paliwoda (1997) also focused on entry modes and they suggested that the chosen entry mode should ensure that the company can “fully capitalise on market opportunities” (p. 81).

Newbould, Buckley and Thurwell (1978) analysed several criteria of success. These criteria were measured along 43 companies that had expanded abroad. The first criterion considered is profitability.

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They have asked the companies how in the current year performance abroad can be compared with that in the home country in terms of profitability. They defined success then as the site abroad being more profitable than the home site. Growth as a measure of success or even failure of an expansion abroad is another criterion used. An expansion would then be considered successful when the desired level of growth is achieved.

This leads to the following definitions of success:

1. The expansion is successful when a market share of x % is gained;

2. The expansion is successful when risk-adjusted long-run return on investment is maximised;

3. The expansion is successful when it is possible to fully capitalise on market opportunities;

4. The expansion is successful when the site abroad is more profitable than the home site;

5. The expansion is successful when the desired level of growth is achieved.

These definitions have been presented to Mr. van Tol. None of these definitions were suitable according to him. When Mr. van Tol was asked when the expansion would be successful according to him, he said the following: “ The expansion is successful when in a couple of years you can determine that you were first on the market. Being the first, taking the lead, that is what is important. The potential market takes up approximately 20 to 25 million, from this, about a fourth is relevant for Kaemingk. Getting a piece of that, at least some hundred thousands of Euros. Maybe between now and 2 years 1 to 1.5 million. Maybe somewhat longer.”

The definition that is most appropriate is the third one. Kaemingk has a specific reason for entering the Polish market: they see Poland as a growth market and as can be learned from Mr. van Tol, Kaemingk wants to gain a piece of that market. This means that when they want to enter the Polish market, and desire to achieve a certain result, Kaemingk wants to fully capitalise on market opportunities. It is therefore the third definition that corresponds most to Kaemingk’s expectations of the expansion.

This chapter has given some definitions of a successful expansion. These have been presented to Mr. J.

van Tol, managing director of Kaemingk. It turned out that what he expected of the expansion was much in line with the third definition. Therefore during the phase of developing a new model and during the recommendations especially the third definition will be kept in mind.

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Chapter 4. Models and theories on internationalisation

4.1 Introduction

Internationalisation can be defined as: “the process of increasing involvement in international operations”

(Welch and Luostarinen 1988, p. 36 ). In this chapter theories and models on internationalisation will be presented. This will be done in chronological order. The goal of this chapter will be to gain some insight in internationalisation and to learn about the aspects of importance when considering internationalisation.

4.2 Vernon

The research of Vernon (1966) tackles aspects of the main stream of trade theory, which has, up to 1966, somewhat been neglected (Vernon 1966). It puts fewer accents on comparative cost doctrine and more upon the timing of innovation, the effects of scale economies and the roles of unawareness and uncertainty in affecting trade patterns. Vernon (1966) begins with the assumption that companies in any one of the advanced countries of the world are not distinguishingly different compared to those companies in any other of the advanced countries, considering their access to knowledge and their ability to understand scientific principles. It can be supposed that these companies all can access the knowledge existing in the physical, chemical and biological sciences. However, evidence shows that the consciousness and responsiveness of these companies to opportunities are a function of ease of communication and following from this, the ease of communication is a function of geographical proximity.

Therefore the idea of knowledge being a commonly free good should be abandoned and it should be seen as an independent variable in the decision to trade or to invest. Vernon (1966) has developed an internationalisation theory for his product cycle that can be divided into three stages; the new product stage, the maturing product stage and the standardised product stage. His theory is based on research conducted in the United States.

In the early stages of introducing a new product, companies are usually confronted with some critical, although temporary conditions. The price elasticity of demand for the products of the individual companies is relatively low. Further the necessity for fast and effective communication by the company with customers, suppliers and competitors is particularly high at this stage. These conditions ask for a site where communication between the market and those employees directly concerned with the new product

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is fast and effective and in which a wide diversity of potential resources that might be needed by the production unit is easily accessible.

When the product matures, which means that its demand expands, normally a certain degree of standardisation normally takes place. However, this does not mean that efforts at product differentiation stop. Quite the opposite; those efforts may even intensify because competitors may attempt to avoid the force of price competition. Furthermore variety may be the result of specialisation. In this stage as well, some implications concerning the location come forward. First, the call for flexibility declines. Second, production costs will become more important and concern about product characteristics will decline. If the product has a high income elasticity of demand or if it is an acceptable alternative for high-cost labour, in time demand will also grow quite quickly in advanced countries like the Western European countries.

As soon as the market develops in those countries, companies will start to question themselves whether it is time to take the risk of setting up a local production facility. It cannot be said how long it takes to reach this stage, however, as long as the sum of the marginal production costs and the transport cost of the goods exported from the United States does not exceed the average cost of prospective production in the local market, United States producers will normally prefer to avoid an investment.

However this is not the only force that is of influence on the decision whether or not to invest on local markets. Many non-economic forces like the threat of a new competitor in the foreign country, the political situation, and the anticipated level of tariff protection may also determine whether a company invests.

When the decision is made to invest in the local markets, local production units will be the first facilities set up abroad. As soon as these are in operation, more possibilities for their use will be possible. If a company is fully exploiting their economies of scale, the main difference between any two sites are most likely labour costs. In view of that it may be a wise decision to begin facilitating third-country markets from the new location. And if labour cost differences are large enough to compensate transport costs, it is even possible to export back to the United States.

As can be seen in the graph in appendix II at a later stage in the standardisation of some products it may be competitive advantageous to set up a production location in less developed countries. If it can be supposed that highly standardised products are likely to have well-articulated, easily accessible markets and to sell largely based on price, as a result, those products will not cause the problem of market information so extremely for the less developed countries.

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4.3 The Uppsala school

The study of the Uppsala school consists of two parts. The first part investigated the ‘stages’ of internationalisation of four Swedish companies (Johanson and Wiedersheim-Paul 1975 in Johanson and Vahlne 1977) It came forward that the order of the development of international operations in individual countries is the following pattern: no regular export, independent representative (agent), sales subsidiary, production. Some of the companies skip one stage, however none of them started producing in a foreign country without working via an agent or sales subsidiary before. The second part of the study aimed at explaining the pattern described above.

Johanson and Vahlne (1977) developed for that purpose a model in which the same basic mechanism can be used to describe the steps in the internationalisation process. According to them a dynamic model would be appropriate. In such a model the result of one decision constitutes the input of the next. One important aspect explaining the process of internationalisation is the state of internationalisation. The state aspects are the resource commitment to the foreign markets and knowledge about foreign markets. The change aspects are decisions to commit resources and the performance of current business activities.

Figure 4.1 shows the basic mechanism.

As said already the state aspects are market commitment and knowledge about foreign markets. Market commitment is assumed to be composed of two factors, namely the amount of resources committed and the degree of commitment or, in other words, the difficulty of finding an alternative purpose for the resources and relocating them to it. Resources situated in a specific market can often be thought of as a commitment to that market. However in some cases these resources can be sold and the financial means can easily be used for other objectives. The degree of commitment is higher the more the relevant resources are integrated with other elements of the company and their value is obtained from these integrated activities. Therefore, generally, vertical integration implies a higher level of commitment than a conglomerative foreign investment. Another issue is that the more specialised the resources are to a given market, the greater is the level of commitment. Altogether it appears reasonable to assume that the resources that are located in a specific market are most committed to that market.

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Figure 4.1 The basic mechanism of internationalisation.

Source: Johanson and Vahlne (1977)

The second aspect, market knowledge, is important as commitment decisions are based on various kinds of knowledge. To begin with, knowledge of opportunities or problems is supposed to originate decisions.

Further, assessment of alternatives is based on some knowledge about relevant elements of the market environment and about realisation of different activities. Johanson and Vahlne (1977) used a classification of knowledge, based on the way it is obtained. “One type, objective knowledge, can be taught; the other, experience or experiential knowledge, can only be learned through personal experience. With experiential knowledge, emphasis is placed on the change in the services the human resources can supply which arises from their activity”. It is believed that this experiential knowledge is critical. It is critical, as it cannot be obtained as easily as objective knowledge. Johanson and Vahlne (1977) also believe that the less structured and properly defined the activities and the necessary knowledge are, the more important is experiential knowledge. It is especially important combined with activities that are based on relations with others. An important feature of experiential knowledge is that it offers the setting for perceiving and formulating opportunities. Based on objective market knowledge only theoretical opportunities can be formulated, experiential knowledge makes it possible to distinguish ‘concrete’ opportunities and to have a

‘feeling’ of how these opportunities will fit into present and future activities.

A direct relation exists between market knowledge and market commitment. Knowledge can be seen as a resource and thus the better the knowledge about a market, the more useful are the resources and the stronger is the commitment to the market.

The other aspects of the model, the change aspects, are the current business activities and the commitment decisions. The first item that comes up when discussing the current business activities is the lag between most current activities and their outcomes. These outcomes may, moreover, even not be

Market knowledge

Current activities Commitment

decisions

Market commitment

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realised unless a more or less continuation of activities exists. This leads to the following; the longer the time lag, the higher the commitment of the company rises. It also appears reasonable to suppose that the more complicated and the more differentiated the product is, the greater the total commitment as a result of current activities will become. Current activities are also the primary source of experience. It could be said that a company could also hire personnel with experience. A distinction should then be made between company experience and market experience, which both are essential. Only when a person has experience with one kind of information, the other part can be interpreted. Therefore even if new experienced personnel is hired, which is the best way to acquire and use market information, still company information is needed in order to interpret this information. This company information and experience has to be obtained through a long learning process in combination with the current activities. This is the reason that the internationalisation process is often proceeded slowly.

The second change aspect mentioned in figure 4.1 is commitment decisions. These decisions are subject to what decision alternatives come forward and how they are chosen. Concerning the first part it could be supposed that decisions are made in reaction to noticed problems and/or opportunities on the market.

These problems and opportunities are supposed to depend on experience. Here, market as well as company experience is important. Problems are normally detected by those segments of the company that are responsible for operations on the market and in the first place by those who are working there. It could be said that whether decision alternatives have been raised as an answer to problems or as an answer to opportunities, they will apply to activities currently carried out on the market. Each additional commitment can have two effects; an economic effect and an uncertainty effect. It is supposed that the economic effect is linked in the first place to increases in the scale of operations in the market and that the uncertainty effect can be associated with the market uncertainty.

This discussion of commitment decisions can be concluded with the remark that additional commitments will be made in small steps unless the company has very large assets and/or the conditions in the market are stable and homogeneous, or some experience from other markets with similar conditions already exists. If this is not the case, market experience will lead to the stepwise increasing of the scale of the operations and of the cohesion with the market environment where the company will take steps in order to correct imbalance with respect to the risk situation on the market.

This model should therefore be used as a base for planning and executing the internationalisation process as it indicates how the experience factor, which is often overlooked by other theories, is related to other internationalisation variables.

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4.4 Dunning’s eclectic theory

Another theory cited frequently is the eclectic theory of Dunning (1980). According to him, the tendency of a company to engage in international production rests on three key determinants: first the degree to which it has assets, which its competitors (or potential competitors) do not have (the ownership advantages), second, whether it is advantageous to sell or lease these assets to other companies or use (internalise) them itself and third, whether it is rewarding to exploit them in combination with the local resources of a foreign country (the location specific endowments) rather than those of the home country.

The more ownership-specific advantages a company possesses, the greater the incentive to internalise.

This is also true for the location-specific endowments; the more attractive a foreign country is, the greater the likelihood that a company will start in international production. An essential feature here is that the capability of companies to obtain ownership endowments is not unrelated to the endowments specific to the countries in which they are active, and especially the country of origin.

The tendency to internalise ownership or location advantages is the third element in the eclectic theory.

The main motivation for a company to internalise its ownership endowments is to evade the disadvantages or take advantage of the imperfections of one or the other of the two major external mechanisms of resource allocation: the market or price system and the public authority fiat. Two important hypotheses come forward from this eclectic theory of international production:

H1 The competitive advantage of a country’s companies in facilitating foreign markets is affected both by the ownership advantages of these companies relative to those companies of other nationalities, and the location advantages in which they manufacture relative to those of other countries.

H2 The form of the participation will in essence depend on the relative appeal of the location specific endowments of the home and host countries.

These hypotheses were tested twice, the first time the data covered foreign activities of U.S. multinationals in 14 industries in seven countries in 1970, during the second test two countries, Mexico and Brazil were excluded as these countries are still adequately different in their stages of development to rationalise separate treatment.

In the first case, with the seven countries, it appears that the main advantages of U.S. companies are exposed in one location specific variable (relative market size) and one ownership specific variable (the

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skilled employment ratio). Two location specific variables (wage differentials and net income per sales) appeared also of influence.

The results attained from hypothesis 2 show that two variables (export/import ratio and net income to sales) explain almost 60 percent of the variation in the location ratio. In the case where the countries Mexico and Brazil were excluded, it appeared that one ownership advantage (skilled employment ratio) and two location advantages (relative market shares and average hourly compensation) were most significant for hypothesis 1. For hypothesis 2 it appeared that the profitability ratio and the growth in sales per man are most of influence.

4.5 Welch and Luostarinen

Welch and Luostarinen (1988) have developed a model with a few dimensions that describes the process of international development of a firm. According to them internationalisation can be related to or even dependent upon development along these dimensions (as can be seen in figure 4.2): operation method, sales object, target markets, organisational capacity, personnel, organisational structure and finance.

It appears that as companies increase their level of international participation there is a tendency for these companies to change their foreign operation method. The Nordic studies (Johanson and Vahlne 1977, Johanson and Wiederheim-Paul 1975) show that this happens in the direction of increasing commitment.

This pattern also seems to apply for greater operational diversity as internationalisation proceeds. This seems to be related to greater experience, skills, knowledge of foreign markets and marketing and the exposure of a larger extent of opportunities and threats. Therefore it can be said that the future international success of a company will to a certain extent depend on their capability to master and successfully apply a range of foreign operation methods.

As companies increase their participation in international operations, there is a tendency for its sales objects to deepen and diversify. This can happen at two levels: expansion within an existing or into a new product line and change in the entire product concept to comprise ‘software’ components like services, technology, know-how or some combination.

Expanded operation methods and sales objects increasingly link with a wider variety of foreign markets, usually more distant over time in political, cultural, economic and physical terms. Normally companies,

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especially in the early stages of internationalisation, approach markets which seem simpler and more familiar and these are usually those which are physically and culturally close.

Figure 4.2 Dimensions of internationalisation

Source: Welch and Luostarinen (1988)

These above dimensions probably demonstrate the internationalisation process of a company best, as the further a company is along these dimensions, the more ‘internationalised’ it may be considered. However, these three only concentrate on the elements of actual foreign market activity. This bypasses the internal company changes which reflect the degree of internationalisation but also found additional steps forward in the whole process. Three of these areas of organisational capacity are most important; finance, personnel and organisation structure.

Organisational Capacity How

International skills and experience;

training Finance

Organisational structure

Foreign operation methods

Personnel Where Political/cultural/

psychical distance differences What

Export department, international division

Goods, services, know-how, systems

Sales objects Markets

Agents, subsidiaries, licensing, franchising, management contracts

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The success of internationalisation is heavily dependent upon the personnel initiating and carrying through the different steps in the internationalisation process and on general personnel policies. Obviously unless the employees involved become more international in their competences, the ability of carrying through any internationalisation strategy is guaranteed to be severely constrained.

Usually the administrative and organisational demands grow and diversify when carrying out international operations and therefore the organisational structure for dealing with these demands eventually needs to respond. It could be said that organisational changes often are a clear statement of commitment to the purpose of international involvement.

Increasing internationalisation without doubt places increasing demand on the availability of financial resources to support the different activities. It could be expected that the range of financial resources and the sophistication of financing techniques develops with international growth.

When examining the six dimensions mentioned above it is possible to get a considerable overview of the state of internationalisation of a company, which could then be used as the basis of comparison to others.

At a general level it is feasible to forecast the development of the company along the various dimensions.

Welch and Luostarinen (1988) furthermore describe some reasons for internationalisation. These can influence the internationalisation process: resources available, knowledge development, communication networks, risk and uncertainty, control and commitment.

4.6 Conclusion

Figure 4.3 shows what the goal of this chapter has been; to gain insight into internationalisation through a selection of theories. From these theories some aspects come forward which are of importance when considering internationalisation. Vernon’s theory is based on the different stages a company’s product is in. The main point lies on the role of knowledge. The eclectic theory of Dunning is a very useful theory, however it has one shortcoming: it is completely pointed towards production. Kaemingk however is, as already explained in chapter One a sales organisation and does not produce itself. Nevertheless the main idea is still useful; the internal (or ownership) advantages and the external (or locational) advantages and their interaction. The most elaborate model is the model of Welch and Luostarinen, in which the different

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dimensions of internationalisation have been described. However when looking at the other theories discussed above, even in this theory, some aspects seem to be missing such as the role of knowledge.

Therefore a new model on internationalisation has to be developed, which will be build on aspects from the theories handled above. This new model will be dealt with in the next chapter.

Figure 4.3 Goal of this chapter and the aspects of importance

A note should be made: much has been written about (specific) foreign entry modes in the literature about internationalisation. As internationalisation comprises more than just these modes (see also Dunning 1980) and Welch and Luostarinen (1988)) these were not included in this discussion.

• To gain an insight into the different theories about internationalisation;

• To gain an insight into the aspects that are of importance when thinking about

internationalisation.

Goal of this chapter

Welch and Luostarinen (4.5)

• Foreign operation methods

• Sales objects

• Markets

• Organisational capacity Dunning (4.4)

• Internal (or ownership) advantages

• External (or locational) advantages

• Their interaction

• However aimed at companies that produce themselves

Uppsala (4.3)

• Market knowledge

• Experience of personnel

• = the experience factor Vernon (4.2)

• The role of knowledge

• However aimed at companies that produce themselves

Aspects of importance

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Chapter 5. A model for internationalisation

As seen in the previous chapter different theories for internationalisation exist, which each emphasise different aspects. However, most of them only handle a small part of the internationalisation process or are more appropriate for producing companies (Dunning 1980, Vernon 1966). As already mentioned in the previous chapter, the model of Welch and Luostarinen (1988) is the most elaborate model for internationalisation as it deals with the most aspects compared to the other theories. It is also a model that could be applied by sales organisations. However, some important mechanisms mentioned in the other theories (Vernon 1966, Johanson and Vahlne 1977, Dunning 1980) are not included in the model of Welch and Luostarinen. This chapter will therefore introduce a new model that will be suitable for a sales organisation going abroad while keeping in mind the aspects mentioned in the previous chapter in Figure 4.3. First a short explanation of the model will be given, then the different dimensions that the model contains will be handled one by one. This will be followed by an explanation of the different links that exist between those dimensions and the desired level of control. Finally the different entry modes will be dealt with. The goal of this model is to come to a conclusion which entry mode a company desiring to expand should choose and what they should do in order to make the expansion successful.

5.1 The model

The model (Figure 5.1) begins with the starting point, or, in other words, how the current situation concerning the market, the internal (company) characteristics and products is. These dimensions all lead directly or indirectly to a certain degree of control. Anderson and Gatignon (1997) developed some propositions that imply that a direct relation exists between the sales object, market, a company’s internal characteristics and the degree of control desired for an expansion. According to them the efficiency of an entry mode depends on four constructs that influence the optimal degree of control. These are transaction- specific assets, external uncertainty, internal uncertainty and free-riding potential (agents’ ability to get benefits without bearing the associated costs). The transaction-specific assets and the free-riding potential contain issues that apply to the product. The external uncertainty applies to the market and the internal uncertainty to the company. Therefore these propositions imply a link between the three dimensions in the starting point and the degree of control.

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The dimensions are not only linked through those propositions, but also directly influence the desired level of control. So could a company for whom promotion is very important desire a higher level of control in order to ensure they maintain control. Another point of influence on the desired level of control is the uncertainty effect, which is the result of market knowledge and experience.

Figure 5.1 Model for internationalisation

The dimensions however also interact; market characteristics influence the sales object and it depends on the internal characteristics of a company whether they will be successful on a specific market.

As said already, the following paragraphs will deal with the different elements of the model; the three dimensions, the links between those dimensions and the level of control and the foreign entry modes.

5.2 Products

Foreign operation methods

(How) Degree

of control Markets

(Where)

Company (Who)

Proposition 5

Proposition 6 to 8 Products

(What) Proposition 1 to 4 & 9

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When looking at the products of a company, four issues come forward: product, distribution, promotion and pricing. These four together make the marketing mix. The next section will handle these issues.

5.2.1 Product

The product, or the bundle of benefits it delivers to the potential customer, is the core of the marketing mix.

In order to satisfy the customers and gain market share, that bundle of benefits has to be attractive and fulfil expectations the customer has. Different decisions concerning the product have to be taken. These decisions will be handled here one by one. First how a company can position its products will be described, then decisions about the brand concept and quality guidelines will be dealt with and finally the product portfolio will be explained (Mühlbacher et al 1999).

Positioning ♦ The international product positioning of a company identifies the differentiation of its products from major competitors. In other words, the fundamental advantage of each product is to be decided independently of the country markets to be served. To supply the fundamental advantage defined in the product positioning statement to individual customers in the differing country-markets, adaptation of product characteristics or of processes which result in those characteristics may be necessary. This is not only because of the different cultural, economic and legal environment of the country markets, but also because of continuously varying individual customer expectations and needs, influenced by a given situation. However, changing existing processes or the design of products has an effect on the costs.

Often costs of a product increase with the amount and variety of adaptations to local or even individual distinctiveness. It is therefore important that guidelines are defined to what extent the company’s products should be standardised or locally adapted.

Standardisation versus adaptation

Economies of scale in production and marketing can lower prices of mass-produced products so far that a lot of customers are willing to give up their individuality and settle for standardised products. Basically three ways exist to standardise a product, each for another circumstance; product extension, the premium prototype approach and a global common denominator policy. First of all, if the company has a good justification to regard the reference market to be a lead market, the product extension policy can be used.

Product extension entails the use of the product presentation developed for a single country-market in all the other country-markets served. The second policy, the premium prototype policy of standardisation implies identifying the most demanding customers and conditions of product use and developing a suitable standard product to meet these demands. This can be used to reduce costs. The problem with such a policy is that the standard of the product may be much higher than what customers are used to or in need of. They may be then unwilling to pay for a level of performance that seems exaggerated to them. Finally, the denominator policy defines an international product-market that exists of customers that can be served

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with a standardised product. This policy is useful when functional benefits dominate the customers’

perceptions or when the product is similarly used across cultural environments. This standardisation policy may also be successful for customer segments with a large share of highly mobile early adopters who have used the product in another country.

Even when global product-markets to serve and the choice of a well-defined customer segment are carefully determined, this often does not avoid product adaptation to local customer needs and the demands of the macro-environment. The potential of standardisation is depending on factors from the macro environment and the market, company characteristics and its product. Considering the macro- environment the following forces call for adaptation:

• When a product is politically sensitive;

• When legal regulations concerning eg. taxes, product liability, norms of hygiene or licensing and registration prerequisites are different;

• When technical specifications are different;

• Different social norms;

• When markets have unique cultural characteristics;

• Variations in geography such as climate.

Market characteristics are also of influence on the standardisation potential. Certain characteristics must be in common in order to standardise. First of all should the product be in the same stage of the life cycle.

Second, the available structure of distribution systems in the different markets are far from being similar.

This makes it often very hard to standardise. Further, products that are mainly bought based on a low price can be standardised as customers are most probably willing to give up satisfaction of individual expectation in exchange for a (standardised) product with a lower price. The product itself is of influence as products and services that are highly unique allow a higher level of standardisation.

Considering the company characteristics, different factors are of influence on the standardisation potential.

A company’s international experience will influence their attitudes, an inexperienced company will want to adapt as less as possible, where as an experienced company will be willing to adapt its products. A company’s goals also have an impact on the level of standardisation. If these are operational, a standardised approach will be preferred. If their goal is internationalisation, their willingness to adapt will be much higher (Mühlbacher et al 1999).

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Table 5.1 Standardisation versus adaptation

Brand concept ♦ A necessary product management decision for every company is if they want to actively brand their products or not. For an internationally operating company, regardless of the kind of customers, the branding of their products may be very important. Brands can be considered as the meaning of products to their customers, in other words, their cognitive and affective structures with reference to those products and their use. Regardless of actively branding a product or not, customers will develop specific product meanings. Therefore if a company is able to let customers perceive an attractive meaning of its products by branding, selling the products will be greatly facilitated. A brand can function as a means of orientation among a great range of potential choices. Brands ease the customer’s choice processes because they decrease the amount of information to be searched, retrieved and dealt with to make a

‘good’ decision. The meaning of a brand also lets a customer identify with it or to use it as a way of self- projection. It should therefore be determined what purpose the brand should primarily fulfil: to be a signal of orientation in a mass market or a symbol through which a customer can project themselves.

Factor Standardisation / adaptation

Reference market is lead market Product extension policy for standardisation Costs should be reduced Premium prototype policy for standardisation Functional benefits dominate customers’ perceptions Denominator policy for standardisation Product is similarly used across cultural environments Denominator policy for standardisation Customer segment with large share of highly mobile early adopters Denominator policy for standardisation

Product is politically sensitive Adaptation

Legal regulations are different Adaptation

Technical specifications are different Adaptation

Different social norms Adaptation

Market has unique cultural characteristics Adaptation

Variations in geography Adaptation

Product is in same stage of product life cycle Standardisation Distributions systems are different Adaptation Products are mainly bought based on low price Standardisation Product or service is highly unique Standardisation Company has international experience Adaptation

Company has operational goals Standardisation

Company’s goal is internationalisation Adaptation

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International companies with brands that have a strong symbolic meaning need highly centralised brand management. In order to have local brand adaptations in a certain line that is necessary to constitute similar meanings in different country-markets, companies have to develop brand manuals. Such manuals classify which elements of brand appearance have to be standardised across the different country- markets, eg. the logo or the colour and shape of the package, and which elements can be locally adapted, eg. the visual and verbal creation of a particular meaning. Brand manuals may also comprise guidelines about brand extensions or ingredient branding activities. In other words, they imply what sort of products may be launched under a specific brand name or they identify the type of customers who may be authorised to use the name of the supplier as part of their own communication campaign and the conditions of the use of the brand. (Mühlbacher et al 1999).

Quality guidelines ♦ An important platform for international marketing success is superior product quality build on the higher attraction of processes including customers, the superior material characteristics of the end product or the uniqueness of its immaterial characteristics. This is especially true in countries where local suppliers have not invested in the quality of their products and quality could there be a means of differentiation. One important determinant creating quality in many customer’s minds is the reliability of a product. However, depending on the degree of immateriality and integrativeness of a product, it may be difficult for a customer to estimate beforehand if a certain product will perform as foreseen. Because the expectations and perceptions of quality by customers may vary between the different countries, companies have to analyse accurately what affects those expectations and perceptions. Based on that analysis, quality standards can then be composed, that should be followed throughout the company. If a company has a total quality management programme, these standards will be part of that programme (Mühlbacher et al 1999).

Product portfolio ♦ The product portfolio consists of a given number of product lines which are consecutive characterised by an extra number of product variations. In order to optimise a company’s international product portfolio, it should be determined how many product lines have to be offered internationally and with how many variations. First of all, the width and depth of the portfolio should be determined. A company’s product portfolio is broader, the more different product lines it offers to a market. Normally, a broad product portfolio attracts more customers than a deep portfolio by presenting different versions of what is essentially the same total product. When deciding how broad and deep the company’s product portfolio has to be, it is important to remember that the main goal is to offer an attractive customer benefit and to create the basis for the creation of a certain meaning of the company’s offer in the customer’s minds. From this perspective, product lines and individual product variations can be analysed conform their contribution to those goals. Further, the balance of the portfolio has to be determined. In managing

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the company’s product portfolio, it is important to have a mixture of products in various stages of their life cycle. It has to be decided which products to introduce where and when, and which products have to be deleted from the product portfolio. Additionally, it should be determined how much resources to spend on every product, in every market. To maintain a balanced international product portfolio, it is of interest to continually develop and, simultaneously with variations of existing products, to introduce new products to the markets in a planned way. ‘New’ in this case can mean an innovation for its global market, new only for the specific country market or only new for the company itself (Mühlbacher et al 1999).

5.2.2 Distribution

Designing an international distribution system is complicated, as it has to consider different geographic areas, changing expectations of distribution partners, differences in competitive structure and different dimensions of the macro-environment, including legal regulations, culture-specific buying habits or the level of economic development, applicable to the company’s business. This part will therefore deal with the distribution systems and will give some tools for channel evaluation, selection of channel members and the managing of channel relationships (Mühlbacher et al 1999).

Generally two ways of distributing goods exist, which are directly to the customer or indirectly through intermediaries. The direct distribution is called integrated distribution, the indirect distribution can be referred to as independent (Mühlbacher et al 1999).

Integrated distribution ♦ When a company has an integrated distribution system, the company’s own employees generate sales, administer orders and deliver products or services. It is called integrated as those employees, regardless of their title or function, are the agents of distribution (Mühlbacher et al 1999).

Independent distribution ♦ When a company has an independent distribution system, it does not directly control the distribution system but uses intermediaries to establish contact with the final customer. If a company has a large control over their intermediaries, it is said they have a company-bound distribution system. Basically two types of intermediaries exist: agents and merchants. Agents fully represent the company in a specific market. They act in the name of the company, however do not take title to the products or bear any economic risks. Merchants on the contrary do take title to the products, which they purchase, handle and sell on their own account (Mühlbacher et al 1999).

Chapter 1. Introduction

Kaemingk goes to Poland

Or: How to successfully expand abroad

Preface

Table of contents

Chapter 1. Introduction

Chapter 2. The research

Chapter 3. Success

Chapter 4. Models and theories on internationalisation

Chapter 5. A model for internationalisation