The profitability of creating international strategies through business model innovation

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The profitability of creating international

strategies through business model

innovation

Abstract –

Many companies in today’s world are operating in more than one country to acquire certain benefits. The company can for example choose to acquire new resources or competencies (Liu et al. 2009). In order to achieve this, the company should adapt her strategy to local cultures and needs (Dawar & Frist, 1999), or should keep other considerations in mind. This research is focused on the question if this internationalization can be achieved through business model innovation, and if this then would be profitable. Little research has been done about business model innovation, and the goal of this research is to add something new to the literature and inform managers that internationalization can also be achieved in this way, instead of more expensive methods. However, the results between the variables are non-significant. Suggestions for further research and improvements are given. Masterthesis Business Studies

Universiteit van Amsterdam Faculty Economie en Bedrijfsunde

Author: Ruud ten Have 5987253

Supervisor: Dr. Dipl.-Wirt.-Ing. Sebastian Kortmann

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1 Introduction

Many companies in today’s world are operating in more than one country. The world is becoming more and more globally oriented, and borders of business vanish. Large investments are made in abroad plants or factories, because they can be very beneficial for the company. Costs can be saved, more flexibility can be generated and new revenues and repatriated earnings can be created (Farrel, 2005). To be successful in this changing global landscape, companies that operate abroad have to adapt their strategy to the local cultures and needs (Dawar & Frist, 1999). These companies can create international strategies in order to adapt to those other cultures (Su, 2013), which can strengthen the position of the company (Naud and Rossouw, 2010), or they can acquire new resources and competences (Liu et al. 2009). Also, for successful internationalization, the company should deal with questions such as how to invest abroad, where to invest and when to invest. For example, should the company create a joint venture, which are the most appropriate countries to invest in, and should the company try to achieve a first-mover advantage or should it focus on late-mover advantages?

In general, strategic changes to adapt or to innovate products and processes are often very expensive and time-consuming (Amit & Zott, 2010). According to Amit and Zott (2010), companies can change their strategy in a less expensive way, by innovating their business model. In earlier work, Amitt and Zott (2008) are also talking about the relationship between business models and strategy, and emphasis that they are complements.

In literature, business model theory is relatively new, and there is still a lot to be uncovered. It is known why a business model is important, it is basically a model of the organizational and financial architecture of a company (Teece, 2010), but much more definitions exists. By innovating the business model, a different strategy can be created, and new product lines or improved processes can be realized (Amit and Zott, 2010). This suggests that by innovating 3

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the business model, international strategies for abroad business can also be created. But Amit and Zott (2010) are talking about the corporate strategy for the company in domestic markets. There is some evidence that business model innovation is linked to internationalization, and that internationalization is linked to profitability, but it is not really clear if there is a direct relationship between business model innovation, internationalization and profitability. This research wants to contribute to this lack of knowledge about business model innovation, internationalization and its profitability. Thus, it investigates the relationship between business model innovation and the creation of international strategies, and if there is a relationship, is it profitable for the company?

To investigate these relationships, two different hypotheses are formulated. Business model innovation can be an alternative for the usual strategy creation (Amit & Zott, 2010), and this research expects that in times of cost savings, companies are thus using this relatively cheaper method for strategy creation. Onetti et al (2012) add to that that business model innovation will influence the location choices, and according to Hoveskog et al (2013), companies should innovate their business model to successfully enter an emerging market. Thus, hypothesis one is; the company creates international strategies through business model innovation.

The second hypothesis is; it is profitable for the company to internationalize. As described in the literature review, there are many benefits for the company to do business abroad. Costs can be saved for example (Demirbag & Glaiser, 2010). Besides, when investigating this hypothesis, companies who are doing business abroad are probably already experiencing some of these benefits, or are expecting benefits in the near future. This assumption is based on the idea that companies only invest money in opportunities, operations, or countries to get more profit, otherwise they would not invest money or they already left the market. Others (e.g. Lu & Beamish, 2001, Chaio et al, 2006) found that there is a U-shaped relationship between internationalization and profitability.

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In general, this research wants to complement the already existing research about business model innovation. The relationships between business model innovation, internationalization, and profitability are unclear, but very relevant. In times of globalization and cost savings, this research hypothesize that business model innovation can be very useful to combine those two elements in a relatively cheaper way.

In the next section, the literature review is given, with definitions of the business model, the idea of business model innovation, and what is meant by international strategies. After that, the survey that is used is discussed in the method section, and the results are given. Unfortunately the results were non-significant. Finally, the conclusion and discussion are discussed.

2 Literature review

In this section, different definitions of business models are explained. Next, business model innovation is discussed, and the reasons for internationalization are given. Finally the links between the variables are discussed.

2.1 Business models

In literature, there are many different stories about what a business model is. They are different in detail and in meaning, and there is no general definition. Some explanations are more specific, others are less. The least specific is the definition of Teece (2010). Teece (2010) say that a business model embodies nothing less than the organizational and financial architecture of a business. According to Magretta (2002), business models are stories that explain how enterprises work. This story deals with customers, who they are and what the customer value is. But it is also about how to make money in the business, and what the underlying economic logic is that explains how to deliver value to customers at an appropriate

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cost. In the business model, all activities associated with making something are included, even as the activities associated with selling something (Margretta, 2002). Timmers (1998) gives the following definition of a business model. It is an architecture for the product, service and information flows, including a description of the various business actors and their roles, and it is a description of the potential benefits for the various business actors, and it is a description of the sources of revenue. According to Amit and Zott (2001), a business model depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities. They argue that a firm’s business model is an important locus of innovation and a crucial source of value creation for the firm and its suppliers, partners, and customers. Next, Dubosson-Torbay et al (2002) say that a business model is nothing else than the architecture of a firm and its network of partners for creating, marketing and delivering value and relationship capital to one or several segments of customers in order to generate profitable and sustainable revenue streams. Their business model framework is divided into four components, namely product innovation, customer relationship, infrastructure management and financial aspects. Another definition comes from Chesbrough and Rosenbloom (2002), a business model provides a coherent framework that takes technological characteristics and potentials as inputs, and converts them through customers and markets into economic outputs. The business model is thus conceived as a focusing device that mediates between technology development and economic value creation. The most specific definitions come from the last two. According Van der Vorst et al. (2002), a business model has six elements: a value proposition, the roles of participants that are interacting with each other, processes involved, functionalities, applications and specific characteristics. Hedman and Kalling (2003) describe a business model based on several components: customers, competitors, offering, activities and organization, resources and supply of factor and production inputs. These components are all cross-sectional and can be

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studies at a given point in time. To make this model complete, Hedman and Kalling (2003) included a longitudinal process component, to cover the dynamics of the business model over time and the cognitive and cultural constraints that managers have to cope with.

There are many, sometimes slightly, different ideas about business models. The authors could not get agreement about one single accepted definition. Based on the literature described above, this thesis uses four general components when talking about a business model. A business model is about creating value, understand the costs and profits, make clear strategic decisions about customers, competitors and strategy, and be aware of the value network. The next section discusses what business model innovation is, and why it is important.

2.2 Business model innovation

Often, companies make substantial efforts to innovate in their products and processes to achieve revenue growth and to maintain or improve profit margins. Innovations to improve processes and products, however, are often expensive and time-consuming, requiring a considerable investment in everything from R&D to specialized resources, new assets and even entire new business units. A less costly way to improve innovation is to use already existing resources and capabilities in a different way. This can be achieved through business model innovation (Amit & Zott, 2010). They also argue that through this business model innovation, different strategies can be created, and new product lines or improved processes can be realized. Gambardella and McGahan (2010) state also that with business model innovation, the firm can adopt new processes to commercialize their assets. According to Chesbrough and Rosenbloom (2002), business model innovation can be important when the company to appropriate value from innovations, and in making a new business model, Santos and Eisenhardt (2005) argue that this new model can enhance control over a new market.

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The role of business model and the innovation of it is a relatively new field and a lot still has to be explored (Teece, 2010). The link between business model innovation and the firm’s general strategy is such new field. Amit and Zott (2010) suggest that the business model and product market strategy are complements, rather than substitutes. They state that novelty-centered business models, coupled with product market strategies, can enhance firm performance. The role of business model innovation and international strategies remains unclear.

Specific examples of how the business model can be innovated are given in different articles. According to Amit and Zott (2010), business model innovation can be achieved by changing one of the three design elements that characterize an activity system. They are content, structure and governance. The content of an activity system is about the selection of activities to be performed, the structure about how activities are linked, and governance about who performs the activity. In this way, new product lines or improved processes can be realized, and the creation and exploitation of opportunities for new revenue and profit streams can be improved. Teece (2010) says that business model innovation is about seeking and considering improvements to business models at all times. These improvements should be difficult to imitate. For example, there may be complicated process steps. To successful redesign, or innovate, a business model, the business model should be evaluated against the current state of the business ecosystem, and also against how it might evolve. The idea of Chesbrough (2010) is that business model innovation requires significant trial and error, and adaption ex post. Also, organizations should identify internal leaders for business model change, in order to create a new, better business model for the company.

2.3 Internationalization

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In a world that is becoming more global, many companies decide to go abroad. There can be several benefits for the company to do so. According to Farrel (2005) there can be cost savings, more flexibility, new revenues, and repatriated earnings. Also, companies could get access to different resources (Thomas & Eden, 2004), and they can increase their market size and business volume (Qian et al, 2008). Lu & Beamish (2004) add that the company can explore and exploit benefits, create economies of scale and scope, exploit firm specific advantages and explore for new knowledge and capabilities.

But why should companies adapt their strategy in countries abroad?

In essence, strategy is about dealing with competition (Porter, 2008). According to Porter (2008), competition for profits depends on five forces. These are industry rivals, power of buyers and suppliers, threat of potential entrants and threat of substitution. These forces are different in different industries, it creates the structure of that industry. Porter (2008) argues that the five forces reveal the drivers of industry competition, and a company strategist who understands them will faster detect threats and opportunities, and adjusts the companies’ strategy to them. Industries around the world will, obviously, vary in respect to the five forces. There can be more industry rivals, more local threat of entrants, or the power of suppliers is higher, for example. Another reason to use different strategies in different countries is that culture and needs vary around the world. McDonalds for example has different products in different countries, in order to deal with the varied needs. Companies must fine-tune their products and services to the particular and often unique needs of the local customers (Dawar & Frist, 1999). As already mentioned, by innovating the business model, different, corporate, strategy can be created (Amit and Zott, 2010). The example of McDonalds can be seen as a multinational strategy. With such a strategy, the company tries to develop location-bound firm specific advantages, through non-location bound firm specific advantages and country-specific advantages (Rugman & Verbeke, 1992). In other words, the 9

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company adapts her strategy in different countries to the local culture, instead of using the same strategy all over the world. However, a global strategy can be profitable, even as an international or transnational one (Rugman & Verbeke, 1992).

In general, many international operating companies are using different strategies in different countries or cultures (e.g. Novaes Zilbe et al., 2010, Su, 2013). As already mentioned, adaptation to local needs and different industries are reasons to do so, but there are more arguments for both internationalization and the use of different strategy. For example, when a company has a weak position, or low market share, it can internationalize in order to compensate this weakness, and thus expand their business (Naud & Rossouw, 2010). Others argue that with internationalizing, different resources can be acquired and therefore different competences can be created (Liu et al. 2009). When these resources are local, the company will enter the new market through an acquisition or joint venture, rather than greenfield. On the contrary, when resources are non-location bound, the company will create a greenfield, or wholly owned subsidiary (Meyer et al, 2009).

In the literature, there are different theories about international operating companies, which operate in different ways because of their international presence. According to Roth and Morrison (1990), companies that face pressure for global integration as well as local responsiveness place a higher emphasis on complex innovation than companies in only the global integration or the local responsiveness subgroup. Furthermore, Roth and Morrison (1990) state that the essence of international strategy is balancing the local demands and creating worldwide competitive advantage. Many traditional multinationals have business units which are entirely autonomous from the parent company (Gupta and Govindarajan, 1991), to deal with these local demands. This business unit is responsible for local innovations and has their own way of working, independent of the parent. To illustrate, some authors give practical examples of internationalization. Some firms are using the same

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distribution channels in similar cultures, but use others in different cultures (Novaes Zilbe et al., 2010), and other companies use low wage countries to build new factories (Farrel, 2005). When entering a new country because of low wages for example, the company first has to make a choice about which country to enter. According to Benito and Gripsrud (1992), companies often invest in countries culturally closer to the home country. And when more foreign direct investments are made, the cultural distance will increase eventually. Companies evaluate potential target countries on different characteristics. Demirbag and Glaiser (2010) argue that investing in a host country will be more likely when wages are relatively low, there is a strong knowledge infrastructure, small country risk, when a company has previous experience in that particular country, and when there is a large pool of scientists and engineers. This is in line with the research of Laamanen and Torstila (2012), however, they add the target country taxation level, existence of supporting industries, existence of a support service infrastructure, and target-country employment rate.

Besides the reasons why, how, and where to internationalize, another question would be when to internationalize. Companies should think about this when creating an international strategy. Basically, the company can decide to be the first one in a unique market, or they can choose to wait for others to enter first. In the first case, companies can generate first-mover advantages (Lieberman & Montgomery, 1988). These advantages arise endogenously, and there are three primary sources: technological leadership, preemption of assets, and buyer switching costs. In combination with environmental change, luck, firm proficiency and first-mover opportunity, these sources can increase profits (Lieberman & Montgomery, 1988). When the company waits for others to enter first, they probably want to benefit from late-mover advantages. According to Lieberman and Montgomery (1988), these include the free rider effect, resolution of technological or market uncertainty, shifts in technology or customer needs, and incumbent inertia from the first mover.

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Company-specific factors, industry factors and host country factors play also a crucial role when looking at the timing of entry (Gaba et al, 2002). Company factors like international experience, size, and product scope have a positive relationship with the likelihood of early foreign market entry. Competitive behavior and market growth are industry factors that positively influence the timing of entry, and the institutional risk is the host country factor which would lower the probability of entering the new market (Gaba et al, 2002).

Finally, Zhou et al (2007) makes the distinction between outward internationalization (e.g., seeking and selling in foreign markets, developing alliances with foreign businesses) and inward internationalization (e.g. utilizing management skills, new technology, and direct investment from foreign countries). The authors argue that the company can benefit from outward internationalization through learning new technologies, and from gains related to the scale and scope of economies. Inward internationalization orientation can enhance the performance of the company through learning about or utilizing foreign technologies, management skills and capital investment.

2.4 Relationships between variables

Previous research already found some relationships between the variables discussed above. Some are much stronger than others, but all are useful for this research. First, the relationship between business model innovation and internationalization is discussed, after that the relationship between internationalization and profitability.

According to Onetti et al (2012), the business model defines the unique way the company delivers its own strategy/value proposition to customers. Based on this business model, a company has multiple alternative options for locating the different activities as well as plenty of ways of executing them. Because of this, they company may develop core competencies and capabilities, which are different from those of competitors that have chosen different 12

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resource allocations (Onetti et al, 2012). Thus, the location decisions are made based upon the strategy or value proposition which is given by the business model. This presumes that when the business model is changed, or innovated, the location decisions will be different. In this way, internationalization could be created through business model innovation.

Hoveskog et al (2013) argue that to successful enter an emerging market, a firm has to innovate its business model. More specific, the success of its business model innovation depends on the ability of managing the turbulent, fast changing environment but also depend on the degree of support the company receives from governmental institutions both in the home and the host country in order to counteract external challenges faced by the company. Thus, business model innovation in combination with certain factors can lead to successful internationalization in emerging economies.

According to Williams and Shaw (2011), internationalization is a form of innovation, successful internationalization requires innovation, and internationalization requires companies to have superior knowledge. More specific, innovation requires identifying and harvesting knowledge both within and external to the company, and internalizing the latter. Successful internationalization therefore requires both openness to external sources of knowledge and effective networking (Williams & Shaw, 2011). These factors can be seen as elements of a business model, since the openness to external sources of knowledge and effective networking can be seen as certain activities. Activities can be part of a business model (e.g. Magretta, 2002; Timmers, 1998; Hedman & Kalling, 2003).

In the study of Cassiman and Golovko (2011), the authors focus on the relationship between product innovation, productivity, and internationalization. They argue that product innovation has a positive impact on productivity, and more important, Cassiman and Golovko (2011) state that product innovation eventually leads to the decision by small and medium enterprises to internationalize. More specifically, product innovation increases the likelihood of the

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company entering another, foreign, market. There is an indirect effect, because product innovation improves productivity, which in turn pushes the company to enter foreign markets, but the authors also found a direct effect between product innovation and internationalization. Filippetti et al (2011) tested the association between internationalization and innovation. They found that companies and countries that are innovative are more likely to be able to penetrate international markets and/or take up investment opportunities in foreign locations. Innovative firms are more successful in international business. Important here however, is the definition they use for innovation. Filippetti et al (2011) use multiple variables to measure innovation. They distinguish between enablers, firm activities and outputs. These measures are comparable to the business model elements of Teece (2010), Timmers (1998), and Amit and Zott (2001) for example.

In the study of Lien and Tsao (2013), relationships between internationalization, family management, and innovation were tested. They found that family management positively moderates the relation between innovation and internationalization. Their findings suggest that family management helps mitigate the agency problems associated with internationalization so that family firms experience positive benefits from internationalization. Important here is thus that there is a positive relationship between internationalization and innovation, although this thesis looks for the relationship the other way around.

Besides the relationship between business model innovation and internationalization, there are also developed theories about the relationship between internationalization and profitability. The findings about this relationship are comparable.

Lu and Beamish (2001) found that the positive impact of internationalization on performance extends primarily from the extent of a company’s foreign direct investment. When companies first begin their foreign direct investment activity, profitability declines, but greater levels of foreign direct investments are associated with higher performance. Although profitability

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declines, it is however still profitable. Also, in combination with exporting, these foreign direct investments can be profitable. Lu and Beamish (2001) conclude that there is an optimal balance between profitability and foreign direct investments, and firms should try to find this balance.

Chiao et al (2006) found comparable results with Lu and Beamish (2001). They found that the relationship between internationalization and performance could be graphically depicted as one of inverted U-shaped curvilinearity, and that a specific level of internationalization corresponded to maximum profitability. Again, although there is an optimal point for internationalization, internationalization is always profitable, even in the non-optimal points (Chiao et al, 2006). They argue that in initial stages of overseas expansion the benefits of a company’s international strategy will outweigh the costs, and conversely, once the degree of internationalization reaches a certain level, the costs associated with the expansion will begin to outweigh the benefits.

In accordance with the findings above are the findings of Hitt et al (1997). They also found that internationalization has a curvilinear relationship with performance. It can create economies of scale, scope, and experience. As a result, such diversification should not only stabilize returns, but should also increase them because of the competitive advantages gained (Hitt et al, 1997).

Geringer and Beamish (1989) found another positive relationship between internationalization and profitability. They state that the degree of internationalization is significantly related to the multinational performance. According to them, companies try many times to diversify their products, but they can achieve the same result through geographic rather than product diversification. Diversifying the companies market internationally is an example of this (Geringer & Beamish, 1989). They conclude that the higher the degree of internationalization,

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the higher the profit will be. In this way, differences in performance between multinationals can be explained because of the differences in internationalization.

According Grant et al (1988) the profitability in the home market encouraged overseas expansion that in turn increased profitability. This is because managers of internationalized companies can make better resource allocation decisions, because corporate managers have superior access to information on the productivity of individual factors, and second, the separation of strategic and operational control in international firms may permit them to overcome some of the agency problems that afflict large management-controlled corporations. International companies have divisionalized structures, and because of that, internationalization efficiencies would lead to offer cost advantages (Grant et al, 1988).

Kim et al (1993) studied the relationship between internationalization, risk, and performance. They suggest that risk adjusted industry return performances affect risk adjusted return performance of the firm. For example, firms operating in profitable and stable industries tend to have a favorable risk adjusted return performance. Moreover, global market diversification is shown to generate a favorable risk adjusted return. In other words, global market diversification, or internationalization, can achieve a high return low-risk profile (Kim et al, 1993). Thus it can be very rewarding for the company to internationalize, but the profitability depends on the market or industry that the company is competing in.

Besides the already mentioned positive relationships between internationalization and profitability, there are also neutral or even negative relationships that have been found. Collins (1990) compared the internationalization of multinationals into developed and developing countries. He found that companies that internationalize into developing countries, have market performance that is inferior relative to investing in developed, or domestic, markets. There are different possible explanations for these differences, according to the authors. The total risk is different in different markets, even as the systematic risk, debt usage

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and risk-return performance (Collins, 1990). More specific, Collins (199) found that the systematic and total risk are lower for those companies investing in developing countries, but their returns are also lower.

According to Mitchell et al (1992), both increasing and decreasing international presence have negative associations with survival, while decreased internationalization is associated with decreased market share. Arguments for this are that undertaking a major change will often cause a firm to fail, even when the industry is one in which firms possessing international operations tend to be the strongest performers. Also, their results suggest that there is an asymmetry between decrease and increase in international activities. Decreased internationalization may be associated with current poor market performance, while increased internationalization has no definite relationship with current performance (Mitchell et al, 1992).

Wan (1998) found that multinationals with high levels of internationalization do not perform better than domestic firms. Also, internationalization has a positive impact on profitability stability and sales growth, but not on profitability. Industrial diversification also enhances profitability but reduces profitability significantly. And finally, neither the hypothesized inverted U-shaped relationship between internationalization and performance, nor the interaction effect from both international and industrial diversification strategies on performance can be validated in their results. Wan (1992) concluded that there is no relationship between internationalization and performance.

3 Conceptual Framework

The existing literature gives a good overview of what business model innovation is and why it is important for internationalization. Figure 1 shows the relationships that are investigated in this research.

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Figure 1: Relationships between business model innovation, international strategies and profitability

The arrows are the part this research is focused on. Evidence of business model innovation in relationship with internationalization is still missing, but based on the literature, a hypothesis can be formulated. To summarize the literature review, there can be different reasons to internationalize, and reasons to use different strategies in foreign markets. It creates new business opportunities, such as new markets and resources, and lower costs, which seems to be profitable for the company. Business model innovation can be an alternative to the ‘usual’ creating of different strategies (Amit and Zott, 2010). Since companies are always trying to find more efficient ways to lower their costs, they probably are already using business model innovation to achieve or strengthen their internationalization.

Other, maybe more important links between business model innovation and internationalization, are given by Onetti et al (2012), Hoveskog et al (2013), and Williams and Shaw (2011), and are already discussed in the literature review.

Onetti et al (2012) argue that location decisions are based upon the business model of the company. Basically, the company has multiple alternatives for the location choice, the one that is most suited according to the business model will be chosen. Apparently, different business models will enhance different location choices according to the authors. This presumes that when the business models will be innovated, the location choices will become different.

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The conclusion of Hoveskog et al (2013) is that companies should innovate their business model, in order to successfully enter an emerging market. The factors that positively influence this relationship are the ability of managing the turbulent, fast changing environment, but also depend on the degree of support that the company receives from governmental institutions both in the home and host country in order to counteract external challenges faced by the company (Hoveskog et al, 2013). This conclusion is useful because many companies in the world are facing turbulent, fast changing environments when they internationalize, not only in emerging markets. In the technology industry for example, radical changes are made every day. Thus, this thesis presumes that business model innovation can positively enhance internationalization.

Williams and Shaw (2011) said that internationalization is a form of innovation, successful internationalization requires innovation, and internationalization requires companies to have superior knowledge. Elements of successful internationalization are both openness to external sources of knowledge and effective networking (Williams & Shaw, 2011). These elements are certain activities, which can be part of a business model (e.g. Magretta, 2002; Timmers, 1998; Hedman & Kalling, 2003). Therefore, this thesis presumes that innovating these activities, and thus the business model, enhance successful internationalization.

The relationships between product innovation, productivity, and internationalization were found by Cassiman and Golovko (2011). They concluded that product innovation has a direct effect on productivity, which in turn has an effect on internationalization. Also, there is a direct relationship between product innovation and internationalization. These findings are important for this research because the product is a mean for the company to express their customer value, which is part of a business model (e.g. Magretta, 2002; Amit and Zott, 2001). Even more important, according to Dubosson-Torbay et al (2002), product innovation is one of the four components of the business model framework. In this way, product innovation can 19

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be seen as a form of business model innovation, and thus would have an impact on internationalization.

The conclusion of Filippetti et al (2011) is that companies and countries that are innovative are more likely to be able to penetrate international markets and/or take up investment opportunities in foreign locations. In their study, innovation is divided into three subcategories, namely enablers, firm activities and outputs. These elements are very comparable to different definitions of a business model, given by for example Teece (2010), Timmers (1998) and Amit and Zott (2001). This suggests that when the company innovate these elements, they basically innovate their business model, and thus are more likely to penetrate international markets or take up investment opportunities in foreign locations.

Family management positively moderates the relationship between innovation and internationalization (Lien and Tsao, 2013). Thus, in this study, there is obviously a relationship between innovation and internationalization, also without the family management variable. This relationship is also positive. Next, it is important how innovation was measured in their study. In line with other studies, their method is comparable with the business model innovation literature. Lien and Tsao (2013) are using technological development as innovation measure, which is in line with the research of Chesbrough and Rosenbloom (2002) about business model innovation.

The arguments above all show a positive relationship between business model innovation and internationalization. Some are stronger than others, but clearly, there are some linkages between the variables, which lead to the following hypothesis.

Hypothesis 1: The company can create international strategies through business model innovation.

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This hypothesis is not only helpful in answering the research question, it also adds more knowledge to the literature about international strategies and business model innovation. This relationship is relevant because it can be useful for managers in finding more cheaper ways to create an international strategy. Also, it gives us a better understanding about business model innovation, and the use and implications of it.

Business model innovation is a cheaper way of creating international strategies than the ‘usual’ creation of different strategies (Amit & Zott, 2010). And as already mentioned, there are several benefits for the company to do business abroad, or different considerations. For example, Demirbag and Glaiser (2010) talked about the choice of host countries, which are more frequently entered when they have lower wages, or lower country risk. Lieberman and Montgomery (1988) argued that first-mover- or late-mover advantages can be beneficial for the company. All these arguments are strategic considerations which a firm should take into account, and when successful implemented, this should lead to more profitability for the company.

Also other relationships were found. To summarize, Lu and Beamish (2001) found that there is a positive relationship between foreign direct investments and profitability. However, there is an optimal balance between these two variables, which means that different investments have different profitability. These investments are part of the internationalization process as discussed in the literature review, thus, it is presumed that internationalization would lead to profitability.

Comparable to the findings of Lu and Beamish (2001) are the findings of Chaio et al (2006). They found a U-shaped relationship between internationalization and profitability, and although there is an optimal balance between that two variables, internationalization is always profitable.

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As already stated, Hitt et al (1997) found comparable results, namely that internationalization has a curvilinear relationship with profitability, and that it can create economies of scale, scope, and experience. As a result, such diversification should not only stabilize returns, but also increase them.

According to Geringer and Beamish (1989), the profitability of companies is dependent of the degree of internationalization. Low levels of internationalization however, are not profitable. In that case, the costs exceed the benefits. Thus, there is certain turning point when the internationalization becomes profitable, which is obviously different per company. Assumed here is that companies will heighten the degree of their internationalization at least until this turning point is reached, otherwise they will stop their business abroad. Thus, based on this research, it can be hypothesized that the internationalization will have a positive relationship with performance or profitability.

The profitability of internationalization depends on the profitability of the company in the home market (Grant et al, 1988). When the company is profitable in the home market, it can internationalize and become also profitable in a foreign market, because of better resource allocation decisions, better access to information and internationalization efficiencies. The relationship that is investigated in this thesis is the relationship between internationalization and profitability, and thus the profitability in the home market is not investigated here. However, when a company is not profitable in the home market, it probably will not invest abroad, simply because they will not have the financial power to do so, or because they should first deal with the problems in the home market.

The profitability of the company is dependent of the market or industry that the company is operating in (Kim et al, 1993). According to Kim et al (1993), the higher the risk, the lower the favorable risk adjusted return will be, and internationalization can achieve high return low-risk profiles. As already mentioned, it can be rewarding to internationalize, dependent on

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the industry or market. Since there is no distinction made in the current research about the industries, no distinction can be made between high- or low-risk industries. However, also in high-risk markets, companies can be profitable, although it is less profitable obviously. Thus, based on this research, internationalization would be profitable.

Besides the possible positive relationships discussed above, there are also potential downsides of internationalization, as discussed in the literature review. Collins (1990) stated that companies that are investing in developing countries have lower market performance than companies that invest in developed or domestic countries. However, these differences are not relevant for the research of this thesis, and thus will not impact the hypothesis. The findings of Collins (1990) show that it is less attractive to invest in developing countries than investing in developed or domestic countries. But these differences will not result in differences in the relationship between internationalization and profitability, although the strength of the relationship will be different.

The potential negative downsides of internationalization which are discussed by Mitchell et al (1992) should be taken seriously. Their statement was that international presence has negative associations with survival, while decreased internationalization is associated with decreased market share. Also, decreased internationalization may be associated with current poor market performance, while increased internationalization has no definite relationship with current performance. Since profitability can be explained as (a part of) performance, the expected relationship between internationalization and performance would be negative based on this research.

Wan (1998) found different results for the relationship between internationalization and profitability. First, companies with high levels of internationalization do not perform better than domestic companies, and internationalization has no impact on performance. The inverted U-shaped relationship that was found in other literature (e.g. Lu & Beamish, 2001;

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Chaio et al, 2006) between internationalization and profitability was not found by Wan (1998). Basically, there is no relationship between internationalization and performance according to the authors.

To summarize, there are both positive- and negative findings about the relationship between internationalization and profitability. However, the positive relationships dominate the relationship, and multiple sources found comparable findings, which is in contrast with the single-sourced negative findings. For example, multiple studies found the inverted U-shaped relationship between internationalization and profitability, whereas only one source contradicts these findings. Thus, these findings lead to the next hypothesis.

Hypothesis 2: It is profitable for the company to internationalize.

As discussed in the literature review, a lot is known about internationalization. They why, how and when’s are frequently talked about in the literature, and the associated benefits are given, such as first-mover advantages. This hypothesis adds something new to that, in the sense that it measures benefits in terms of profits or money. In times of globalization, this hypothesis is very relevant, because it gives managers an incentive to actually internationalize their business. Or obviously, not internationalize at all, when this relationship is negative.

4 Method

In this section, the method of the research is discussed. Deeper understanding of the survey is given, even as the sample, data collection, variables and data analysis.

4.1 Research method

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This research is a quantitative research, and to collect the data a survey is used. According to Saunders et al. (2011) this is a useful method to analyze relationships between different variables, and this method is often used for descriptive or explanatory research questions. More specific, this research uses a self-administrated survey, which means that employees are given the survey and can fill it out by themselves (Saunders et al., 2011).

However, there are some disadvantages with the use of a survey (Saunders et al., 2011). The first one is that it is hard to reach a large sample, and the questions that can be asked in the survey are limited. To solve the large sample issue, this research uses an online survey, which is sent to respondents by e-mail. There are some more advantages by using online surveys. Saunders et al. (2011) state that with using an online survey, the researcher cannot influence the respondents by watching them filling out the survey. Wright (2005) adds that the online survey saves time and money. But he also adds some disadvantages. The first one is that the researcher is not sure that the people who receive the online survey will actually fill it out. Also, if there are too many questions, the respondents may stop filling out the survey. And third, when the researcher decides to send out an online survey, not everyone may be reached because they do not have internet (Wright, 2005). The first two disadvantages can be tackled by sending out as many surveys as possible. In this way, the sample will be big enough, even if respondents decide to not fill out the survey. The lack of internet remains a problem however, but probably there will not be many people or companies that do not use internet these days (Wright, 2005). Thus, this method is a good one for this type of research, and because there is limited time to do this research, this is the fastest way to collect the data.

4.2 Sample and data collection

The sample for this research is drawn from international operating companies, which have an establishment in Holland. In the ideal situation, a probability sample (Saunders et al., 2009) is 25

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used. This means that every international company in Holland has the same chance to receive the survey, and thus create a decent sample from the total population. However, this is not exactly the way this research was conducted. Because of limited time and resources, for example incentives for top managers to cooperate, respondents are mainly friends and family working for international companies. More about this in the limitation part. The respondents were also asked to send the survey to colleagues working for other companies. Also, social media like Facebook was used to distribute the survey. Because of all this, the response rate is hard to figure out. The language of the survey was English.

The number of surveys that should be filled out depends on the total population of international companies (Saunders et al., 2009). For example, with a population of 1000, there should already 278 surveys be filled out. Again, since this research is not conducted in the most ideal situation, the aim was to at least get 50 respondents, in order to conduct statistical inferences. Eventually, 110 people started the survey, of which 56 completed it. From that 56, four were manually deleted out of the database because of incomplete results.

From the respondents, the average years of experience in working for the company is 10,8 years. The average of working in a specific business unit is 9,69 years. Most respondents are working for Dutch companies (30), a few in Germany (10). Other countries were France (3), USA (3), Colombia (1), Finland (1), Hungary (1), Sweden (1) and the UK (1). The industries the respondents are working for differ from services (24) to manufacturing (6), and finance, insurance & real estate (6). Other industries are retail trade (4), transportation & public utilities (4), construction (3), wholesale trade (3), mining (1) and public administration (1).

4.3 Variables

Three different variables are measured in this research. First, the independent variable is business model innovation. To analyze this variable, we used multiple questions based on the

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business model framework developed by the Boston Consulting Group (Kiron et al., 2013). In that model, the business model is described in terms of a value proposition and an operating model. For example, in the value proposition is the product or service offering included. The related question included in the survey is, we have significantly changed our product or service offering to satisfy the needs of our target segment. The appendix included all other questions about business model innovation, and also the other variables.

The second variable, the dependent variable, is international strategies. In this research, measures of Zhou et al. (2007) were used to investigate this variable. They created five items to measure inward- and outward-internationalization orientation strategy. In this research, these five items were used to measure only one variable, namely internationalization. Thus the distinction made by Zhou et al (2007) is not used here, because this research is focused on all aspects of internationalization, the overall view of it.

The third variable is profitability. Per company, the market share and revenues are analyzed, the higher the score, the higher the market share or revenues were in the last five years.

Finally, years of experience is used as a control variable.

Because the survey used more than one question per variable, the reliability of these questions is investigated, using Cronbach’s Alpha. If the score is between 0,6 and 0,8, the reliability is reasonable, if it is higher than 0,8, the reliability is good. In the case the score is lower than 0,6, the questions are not reliable and thus cannot be used. The results of this test are in the next paragraph.

The scale which is used in the survey is the 7-point likert scale, because it is a validated scale. Rating 1 stands for totally disagree, rating 7 stands for totally agree.

4.4 Data analysis

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Different analyzes are made to test the relationships. These analyzes are made in the computer program SPSS. As already mentioned, the Cronbach’s Alpha is first measured. For all three vriables, the reliability is higher than 0,7. See table 5.1 in the result section for the Cronbach’s Alpha, mean, and standard deviation per variable. An important remark here is that one of the items of Performance, namely market share, has been recoded in the database. Instead of a score of 1 to 7, the imported survey results created scores from 8 to 14.

When all variables are reliable, which is the case, the correlation between the variables can be measured. When the correlation between two variables is 1, it means that when variable A increases, variable B also increases. When the correlation score is -1, it means that when variable A decreases, variable B will also decrease.

If there is a significant correlation, the regression analysis can be performed. In this analysis, Business Model Innovation is the independent variable in relationship with Internationalization, which than is the dependent variable. In the Internationalization-Performance relationship, Internationalization is the independent variable, and Internationalization-Performance the dependent variable. Finally, the descriptives per variable are given. All these elements are discussed in the results section.

5. Results

In this section, the results per variable are discussed. The mean and standard deviation are given, even as the correlations. Also, the regression analysis is included,

Table 5.1 Descriptives of variables Business model innovation

Internationalization Performance Experience (control var)

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Cronbach’s Alpha 0,753 0,837 0,863

Mean 4,163 3,638 4,34 9,6923

Standard deviation 1,11547 1,41 1,74 10,92854

As stated in table 5.1, the reliability of Business Model Innovation is reasonable, and the reliability of Internationalization and Performance is good. In table 5.2, the correlations are given.

Table 5.2 Correlations between the variables Business Model

Innovation

Internationalization Performance Experience (control var) Business model Innovation 1 -0,164 (0,312) 0,305 (0,56) 0,165 (0,308) Internationalization -1,64 (0,312) 1 -1,91 (0,239) 0,90 (0,525) Performance 0,305 (0,056) -1,191 (0,239) 1 0,112 (0,493)

Between the curling brackets the significance is given. Unfortunately, all scores are non-significant.

We see in table 5.2 that the correlations are not significant. This means that the regression analysis is also not significant. However, table 5.3 shows the regression analysis between

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business model innovation and internationalization, and in table 5.4 the regression analysis between internationalization and performance is given.

Table 5.3 Regression analysis between business model innovation and internationalization Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 4,652 ,840 5,537 ,000 BusinessModelInnovation -,200 ,195 -,164 -1,024 ,312

Again, the relationship between business model innovation and internationalization is not significant (β = -0,164, p = 0,312, F = 1,049, R² = 0,027). Adjusted R square is 0,001.

Table 5.4 Regression analysis between internationalization and performance

Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 8,768 ,824 10,646 ,000 Internationalization -,244 ,203 -,191 -1,197 ,239

This relationship is also not significant (β = -0,191, p = 0,239, F = 1,434, R² = 0,036). Adjusted R square is 0,011.

6 Discussion

Here, the results are discussed, even as the practical implications, limitations and suggestions for further research.

6.1 interpretations of the results

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Each variable had a reasonable to good reliability, however, the correlations were not significant. Because of that, the regression analysis is not valid,

First, some individual things per variable can be interpreted because of these results. With the Business Model Innovation variable, the mean is 4,163, which means that the companies did not radically changed their business model in recent years, but they also did not change anything at all. The truth lies somewhere in between.

For internationalization, the mean is 3,638, which means that the companies not really focused on acquiring new management skills or technology from companies operating in foreign countries. Aggressively seeking new markets and forming alliances are probably not among the priorities of the particular companies.

For the performance, the mean was 4,34, which means that the market share and revenue slightly increased in recent years.

As already stated, there is no significant correlation between the variables, and also the regression analysis is not valid. Apparently, there is no relationship between the variables, as hypothesized before. The practical implications of that, and possible limitations are discussed next.

6.2 Practical implications

Despite of the non-significant results, some possible implications can be given about this thesis. Apparently, the findings of other authors are not valid for this thesis. This could mean that that findings are not valid for the Dutch market, since almost all data is gathered there, which would have implications for managers in that country. For example, business model innovation cannot lead to internationalization, and internationalization in turn will not lead to profitability in that country. Managers in Holland should keep this in mind when they consider decisions regarding business model innovation or internationalization. If they want

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to achieve internationalization for example, they should keep in mind that they have to find other ways of doing that, and not use business model innovation.

Next, although this thesis found non-significant results, the literature review can be used by managers. Earlier research did find significant results, which can be used by managers in deciding to innovate their business model or to go abroad. For example, they can use the previous literature, and try to find conclusions based on the same industry that the company operates in.

Another explanation for the different findings can be differences in samples, or differences in methods. These differences are discussed in the next part.

6.3 Limitations and further research

There are different possible explanations for the non-significant results. To start with Onetti et al (2012), the assumptions this research made based upon their research are apparently not good ones. There can be several reasons for that. First, the method of their research is different than the one which is used in this research. Onetti et al (2012) made their assumptions based on a literature review, and research that is done in other countries than Holland. This thesis also made assumptions based upon a literature review, but got the results based upon a survey, distributed in Holland. These differences can be the reason for the different results. Another point is that Onetti et al (2012) argue that location choices are based upon the business model, but it is not really clear if this conclusion is valid for national, international, or both, location decisions. If it is only valid in national location choices, this can be the explanation why that results are not in line with the results this study. Apparently, the results of Onetti et al (2012) are not generalizable, at least not for the sample this thesis investigated.

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The research of Hoveskog et al (2013) is apparently also not generalizable for this study. There are two main explanation why this probably is the case. In their research, Hoveskog et al (2013) argue that there are several factors that are enhancing the successful internationalization after the business model innovation. These factors are the ability of managing the turbulent, fast changing environment, and the degree of support that the company receives from governmental institutions both in home and host country. These factors are not included in the research of this thesis. Possibly, these factors or capabilities are absent in the companies from the sample, or they are not strong enough to generate a positive relationship between business model innovation and internationalization.

Another possible explanation is that Hoveskog et al (2013) focused on emerging markets. This thesis did not, the focus was mainly on Dutch companies. The assumption that companies who internationalize in developed markets can also face turbulent environments is possibly not valid here.

Based on the research of Williams and Shaw (2011), this thesis made the assumption that when the company innovate a certain part of the business model, namely activities, successful internationalization can be created. Also this assumption is probably false. There can be different reasons for that. First, it is not exactly clear if the activities which were mentioned are really the activities that were meant by the authors of the business model literature. Maybe they are not, and therefore the results are not as hypothesized. Next, business model innovation is much more than only innovating the activities of a company. Possibly, much more elements of the business model should be innovated to create a significant relationship with internationalization. Finally, the particular industry of the research of Williams and Shaw (2011) is the tourism industry. This thesis was not focused on this tourism industry, but had respondents of much more industries. It is possible that the results of Williams and Shaw (2011) are only valid in the tourism industry.

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There are different potential reasons why the product innovation, internationalization relationship of Cassiman and Golovko (2011) was not supported in this thesis. First, in the literature, product innovation is described as a part of a business model (Dubosson-Torbay, 2002). However, that is only one of the definitions of a business model, and much more different definitions exist, and much more elements are included. All these other elements are also taken into account in this research, and in measuring business model innovation. Thus, the measured business model innovation is not really in accordance with product innovation, much more is measured. Besides that, the sample of Cassiman and Golovko (2011) is drawn from Spanish small and medium manufacturing firms.

Also in the study of Filippetti et al (2011), their sample and method is different from this study. To start with their sample, they used a survey, which had 5,234 responses in 29 different European countries. Almost every country had a sample of 200. Besides that, their measurement of innovation contained more than 25 items, the innovation scoreboard as it is called.

Again, also in the study of Lien and Tsao (2013), a completely different sample is used. They used a sample based on the publicly listed companies on the Taiwan Stock Exchange, from the period 2000-2009. They used financial data on internationalization from the Taiwan Economic Journal database, and multinational companies were selected.

For the relationship between internationalization and profitability, earlier research of Lu and Beamish (2001) and others is discussed. Apparently their results are also not valid for the research of this thesis. In the case of Lu and Beamish (2001), there are two main reasons why this could be the case. Their research focused on the Japanese market, and studied 164 companies in that country. Obviously, the sample this thesis used is much different. Besides that they focused on Japanese companies, they focused on small and medium enterprises. This distinction was not made in this thesis, all companies where included, from local companies 34

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to multinationals. Another point is that this thesis uses a much broader perspective of internationalization than only the foreign direct investment. For example, also the utilization of skills from foreign companies, the use of technology from foreign companies and the development of alliances are included in this thesis. These differences probably lead to different results.

Chiao et al (2006) also used a very different sample than this thesis. They focused on Taiwanese small and medium enterprises, and used the electronics and textile industry.

To be in the sample of Hitt et al (1997), the firm had to be a manufacturing firm, have average sales exceeding $100 million between 1988 and 1990, and demonstrate either product of international diversification, or both. That is a very different sample than the sample that this thesis used.

The conclusion of Geringer and Beamish (1989) was that that the degree of internationalization is positively associated with the degree of profitability. The results of this thesis are not in accordance with that conclusion. Again, the main difference between the studies is that Geringer and Beamish (1989) investigated the 100 largest multinationals in the United States and Europe. Also, their measurement of internationalization is different, even as the profitability measurement. For example, they used profit-to-sales measurement to measure profitability.

The home market profitability is an important element to be profitable abroad (Grant et al, 1988). This thesis did not focus on the profitability at home, which should be included in future research. The data set consisted of 304 of Britain’s manufacturing largest companies. Also, their measurement of performance is slightly different than the measurements in this research, Grant et al (1988) used the return on assets as performance indicator.

Kim et al (1993) started with a sample of 152 large United States’ multinationals listed in the 1982 Forbes survey of large United States’ multinational corporations. Again, this sample is 35

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not comparable than the sample of the current research. Also, that data may be outdated, since it is data from 30 years ago, and thus will not correspond to the collected data of this study. Also the measurements are not entirely the same in the compared studies.

Although the research of Collins (1990) was not really relevant for the research of this thesis, it has important results in their research. He talked about the differences in performance for companies when investing in different markets, developing or developed/domestic markets. There are significant relationships between those variables according to the authors, which could have explained some of the results in this thesis, if the results were significant. For example, this thesis could also made a distinction between the internationalization in developing or developed markets. However, this has not been done in this thesis, and different companies investing in different types of markets are all in one sample. Also, Collins (1990) used companies that were equal in size and invested comparable percentages in international involvement. These are all lessons for this thesis that could have been used for creating a sample that probably would lead to significant results.

Based on the research Mitchell et al (1992), there would be a negative relationship between internationalization and performance. However, there are some differences between their research and the research of this thesis, in the sense that Mitchell et al (1992) focused more on the long-term relationship between internationalization and performance, whereas this thesis focused relatively more on a certain point in time. Mitchell et al (1992) also made distinctions between different stages in internationalization. Finally, their sample was drawn from companies in the medical sector. These differences are relatively big, and may explain the differences in results between their study and the results of this thesis.

As already mentioned, Wan (1998) found that there is no relationship between internationalization and profitability. He also did not found the inverted U-shaped relationship between that variables, which were found by Lu and Beamish (2001) and Chiao et al (2006). 36

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These differences mirror the differences that can arise when there are two different methods or samples used for the same research, and thus why the results of this thesis are so different than all the literature discussed. In his research, Wan (1998) used the largest corporations in Hong Kong, a developing economy which has maintained high economic growth since the 1950s. The initial sample consisted of the largest 120 companies listed on the Stock Exchange of Hong Kong in terms of market capitalization at the end of the 1990 (Wan, 1998). Again, this is a very different sample than the one created for the current research.

To summarize, the main possible reason why the results differ are the samples and measurements. In all the literature used, different samples in different countries in different industries are used. Apparently, the differences are so big that none of the results are generalizable to this thesis. Also, the variables, business model innovation, internationalization, and profitability, are measured sometimes only slightly different in the literature, and sometimes relatively more different than this study did.

There are several other limitations of the research. First, the amount of respondents. Because of limited time and resources, there were ‘only’ 52 respondents. For the reliability of the research, this should have been much more. Next, the respondents are mainly friends, family or friends from friends. Many of them are probably not in the position to know all about the business model of the company, or its international strategy. Also, many of them have little experience, since they work only a few years for the company. And because of confidentiality, some might not have given all information available. Finally, the sample is not really random, since the respondents have certain relationships with the researcher.

Also, the generalizability is doubtful. No distinction was made between different industries, jobs, or cultures. Further research should deal with these limitations.

More respondents should complete the survey, and the sample should be random. Also, distinctions between industries, jobs and/or cultures should be made, and the respondents 37

The profitability of creating international strategies through business model innovation