How to shape an international network relation?

How to shape an international network relation?

A case study of a Dutch small firm’s sales network in Australia

By

Mathijs Mulder

1

Introduction

Nowadays, the world is globalizing. Firms, big and small, have more opportunities to get in touch with people and firms all over the world. Furthermore, information is more transparent through new technologies and therefore markets are easier to access. With this globalization and easier access to markets, the economy is globalizing and firms can sell their products in different countries, spread all over the world.

In this globalized economy, the influence of small firms is rising. This is a consequence of the shift of the economy in the 1970s, when the economy switched from a managed economy to an entrepreneurial economy (Storey & Greene, 2010). In this entrepreneurial economy, small firms fit better to the conditions of the environment (turbulence, change and heterogeneity). Therefore the number and influence of small and medium firms is getting larger and larger. According to the OECD (2009) 99.8 % of the businesses in Europe has less than 250 employees. Therefore this group’s influence on the economy is so large and also interesting to study.

2

countries. All cultures have their own habits and methods. These specific habits have influence on the cooperation between the firms from these countries, as the firms are not always used to the method of its international partner. Firms need to adjust to their international partner, otherwise they can collide. All these problems have to be taken in account in shaping an international network.

With the economy globalizing, small firms are creating connections to other firms across the globe and thus creating international networks. As stated before, there are some obstacles in forming an international network for small firms. For instance, creating a feeling of trust between the partners (Das & Teng, 2000), which is also influenced by the distance of the international relation between the partners (Katsikeas et al., 2009). It is interesting to research, how small firms can shape such an international network and which properties are of interest in this process. For instance, what sort of connections should be used in these international relations and how many connections are necessary in a network? Furthermore, how should a small firm relate to these connections? Is there need for intermediaries? Until now, limited information is available on this specific topic. With this research, information on this topic will be provided. In order to research this, structural network theory will be used. As this theory focuses on the positional characteristics of the partners in the network and how these partners connect to each other, it will help in answering the research question.

This research is from a theoretical perspective interesting to study. As there is a research gap on this topic, little information is available at this point. In the economy nowadays the number of small firms is large; therefore it is interesting to investigate the issue of how these firms can shape an international network. This thesis will do an in depth case study to see how the practice deals with shaping an international network and how it overcame the obstacles in this process. It is interesting to see how a real life case deals with shaping an international network, because this can provide suggestions or implications for the theory. As stated before, the economy is globalizing. Firms are selling and producing worldwide for their customers. Small firms are no exception on this and also create connections worldwide. As there are so many small firms in the economy nowadays, it is interesting to research how small firms form their networks worldwide. This thesis will research this from a structural network perspective. The following research question will be used: How to shape an

international network relation for a small firm based on network properties?

3

conceptual model is presented. A description of how the data is collected and analyzed follows; this is called the methodology section. An in-depth case methodology is used to describe how an international relation is shaped. The analysis and results of the in depth case of Verbruggen, where the case study was held, will then follow afterwards. This paper is ended with a discussion and conclusion on the topic, in which also some suggestions for the network of Verbruggen are provided.

Literature review

As the world is globalizing, the economy is also globalizing. Information is getting more transparent and therefore more firms have access to resources, information and markets. As a consequence of these two shifts, firms can link to partners over the whole world and sell their products. With this linking and selling to partners, a connection arises. However, how should such a connection be created? How many connections and with whom? There are also several other network problems to overcome and further there are international problems to be dealt with. With these problems, the question grows: “How to shape an

international network relation for a small firm based on network properties?” This research

investigates this problem from a structural network perspective. A small firm has been chosen for this research, because they are a large percentage of the total firms nowadays. A small firm can be defined, according to Nooteboom (1994), as a firm that has the following three characteristics: small scale, independence and personality. A small firm, according to European norms, has fifty employees or less (Storey & Greene, 2010).

Networking concepts

4

Similarities Relations Interactions Flows Functions Things that are

equal for both actors, for instance they are in the same group or live in the same area

How the actors are related to each other, for instance they are friends or the relation is boss-employee

The number of times there was contact, for instance how many times an email was sent

What is transferred between the actors, for instance information or cash

Table 1: The four properties that describe a relation (Borgatti & Xun, 2009)

These relations between firms are unique. For instance, a possibility is a relationship with a big firm from the same area, in which the firm is active itself, that is competitive related and there are just a few interactions about the products and cash that is exchanged. Another possibility is a relationship with another small firm from that same area, which is competitive related, with daily interaction and this time private information is exchanged. Through using networks, both sides can benefit from each other by sharing specific information or resources. A firm can have several of these connections to several different partners. These connections could also be with media, authorities, advisors, consultants, competitors, universities or cooperative firms. A firm creates its own network with their own partners by connecting to them. But these partners can also create their own network of which the discussed firm is a part of. Figure 1 shows a network, in which the red central node is the discussed firm that creates connections and the blue nodes around are its partners. Figure 1 also shows that the partners can have connections with other partners in the network of the red node.

Number of connections

The structural network theory contains also several other concepts, in which the emphasis is on networks and how it is structured. The position of the actors in a network is discussed, as is the number of partners and the diversity of the partners. As said, networks can be very different, not only in sort of partners, but also in sizes and diversity. A network can have a few connections, for instance when a small firm has just started. At this point, it does not know many people and it is still orienting on the product and its market. A network can also have a large

network, for instance a big firm like Microsoft, which has worldwide lots of suppliers and customers and a wide diversity of other partners.

Direct and indirect connection

The structural network theory also discusses the connections between the partners in a network. This can be described from the perspective of Borgatti & Xun (2009). But it is also possible to make a distinction between direct and indirect connections. A direct connection is when two actors are directly connected, as

Figure 1: A firm’s network

5

shown in figure 2. In this situation there is direct contact between, for instance firms B and C. But also indirect connections are possible, for instance when firm A is directly connected to firms B and C. However between B and C there is no direct connection. These are connected via firm A and thus indirectly, as can be seen in figure 3. In a situation like depicted in figure 3, there is case of a structural hole. Some networks contain structural holes.

Networks and value

Related to the structural holes, there is some discussion about optimal network positions properties. According to Burt (1982) structural holes create unique information and benefits for the actors of a network. These unique information and benefits are created by brokering connections between segments that otherwise would be unconnected (Burt, 1982). Therefore, a network creates more new and diverse information. However, according to Coleman (1972) the value of a network comes forth from dense

(closed) networks and redundant ties. In dense networks there are only a few partners and there is more trust and reliability, which creates value. This discussion about optimal network positions properties provides different outcomes what creates value in a network, it depends on the kind of network and its environmental conditions. For instance, in network relations in which reaching a diverse pool of actors and information, structural holes create more

value. But if there are close network relations, for instance family, then using Coleman’s (1972) closed networks creates more value. So it is really dependent on the network and its environmental conditions.

Customer network

A relation contains at least two actors (or three actors in case of an indirect relation). The actors in a network are diverse. They can vary from suppliers to advisors and from consultants to universities. In a sales relation, one of these actors is a customer. The other actor is the firm selling their products to the customer. A sales connection fits into the previous discussed network theory. To show this, an example is made of a sales relation put into the earlier discussed theory of Borgatti & Xun (2009). Table 2, beneath, shows how a sales connection fits in these four properties of Borgatti & Xun (2009).

This research describes a business to business market relation, a customer is therefore a business that is buying goods in order to produce and sell on its own. The manufacturer is supplying goods to the retailer, that sells them to consumers. For instance a potato maker sells potatoes to a fast food retailer, who makes fries of the potatoes and sells those fries to consumers.

6

Similarities Relations Interactions Flows Functions The customer and

the selling firm have interest in the same product.

There is a relation of seller-buyer between the two actors.

They meet once a year, to discuss details of their products they sell/buy. Further they mail once in two weeks for details of an order.

From the buyer there flows money to the seller and from the seller products are moving to the buyer.

Table 2: An example of a sales relation, based on the four properties of Borgatti & Xun (2009)

New and existing customers

A customer can be distinguished in two groups: new customers and existing customers (Keller, 2013). A new customer has never bought any product from the selling firm and has thus no relation with the selling firm. An existing customer has bought in the past from the firm and they already have a connection. Therefore, there is a major difference in relationship between these two groups. A selling firm has to adjust to the different sorts of customers, with a new customer everything has to be talked through and to be arranged. For instance the way of communication and which roles both actors fulfill. An existing customer already has experience with communicating and coordinating with the selling firm.

Customer value and needs

For a customer relation, it is important that customer value is created. This, in order to attract new customers, as well as to maintain existing customers. Customer value can be defined as a tradeoff between the quality or benefits buyers perceive in the product relative to the sacrifice they perceive by paying the price (V. Larie, 1990). In order to create customer value, a firm has to fulfill the customers’ demands and needs. These needs can be an exceptionally good product which suffices to all demands of the customer or a relatively good product for a low price. However, customers’ needs are not only related to the product and its demands. Also non-product related things can create customer value for customers. Non-product related aspects are more decisive if a customer values the after sales service high or if a customer prefers a pleasant relation with the selling firm.

7

Network properties and their consequences

Type of connection

In the structural network theory, a distinction is made between a direct and an indirect connection. In this research, about a small firm’s sales network, both are possible to make a connection. Previously, on page five, the difference in buildup between a direct and an indirect connection is explained (see figures 2 and 3). However, which could fit better for a sales network of a small firm?

Direct connections

One way to connect with other actors is through direct contact. Whenever there are direct connections, there are no structural holes in the network (Burt, 1982) and thus is there a dense/closed network (Coleman, 1972). According to the literature a closed network with direct connections has several benefits. For instance, a firm is closer to the other actors. This way more exclusive information is shared between the firm and the other actors (Granovetter, 1973). As there are no middlemen involved, it leads to faster communication and quicker decisions. This, as a result of directly sent information between the actors, which is a benefit in current times. Also, the chance of miscommunication is smaller with direct connections, because there is no middleman that can misinterpret the message. The last benefit is that in a direct connection, there is more trust between the partners (Granovetter, 1973). Which is according to Das & Teng (2000) essential for a smooth relationship. However there are also drawbacks. If the direct connection gets too personal, the purpose of doing business is less important. In which case emotional, and not rational, decisions can be made. Another disadvantage is travelling costs. However these are less in this digital area, but they still exist. Because of face to face meetings (in table 3, an overview is provided of the benefits and drawbacks).

In the case of a small firm’s sales network, a direct relation means that someone inside the small firm has direct contact with a customer of the small firm. All the benefits and drawbacks above are of interest for a small firm’s sales network. Therefore, if the small firm chooses to use a direct connection, it has to take these benefits and drawbacks into consideration for its (potential) customers. For instance, the small firm should prevent that it gets too personal with its customers. Otherwise the small firm does not take optimal decisions anymore.

Indirect connections

8

network. The benefits of using an indirect connection are that the relationship does not become too personal and thus a smaller chance of emotional decisions. Furthermore, these intermediaries are specialized to take care of relations between other actors and their client. As these intermediaries are familiar with the area, they already have their contacts in that specific area. Therefore they can reach more people in that area. Another benefit is that the firm does not need to pay a lot of attention to the relation after the intermediary has started, because the intermediary takes care of the relation. This saves costs for the firm. However, a disadvantage is that an intermediary can get out of line without the firm knowing. It is possible that he is working also for another firm without telling. Lastly, to have an intermediary working for you costs money.

A small firm can thus sell via direct connections to their customers, but it can also use indirect connections for their customers in its sales network. With an indirect connection, an intermediary is used to communicate between the small firm and its customers. This intermediary takes care of the sales between the customer and the small firm. As stated, the intermediary can get out of line. It is therefore important that a small firm can fully trust their intermediary. Furthermore all the pros and cons of using indirect connections also apply for a small firm’s sales network. Therefore these have to be taken into consideration for a small firm before selecting indirect connections for its sales network.

Direct versus indirect connections

9

Direct connections

Indirect connections

Pros Cons Pros Cons

A firm is closer to the customer and more exclusive

information is exchanged

(Granovetter, 1973)

The relationship can get too personal

It brings in new ideas and routines

(Billington & Davidson, 2013)

An intermediary can get out of line

Decisions are made faster

There are travelling costs to meet up with actors

The relationship is not too personal, so a smaller chance of emotional decisions The intermediary costs money There is a smaller chance for miscommunication An intermediary is specialized in dealing with connections There is more trust

between the actors (Granovetter, 1973)

An intermediary is familiar with the area, so he can reach more people

Fewer effort for the firm to keep in touch with actors, which saves costs

Table 3: An overview of the pros and cons of (in)direct connections

Number of connections

In order to answer the main question of shaping a network, the number of connections between the firm and the actors is also of importance. As the direct and indirect connections were just discussed, there was a difference between these two types of connections in number. As can be seen in figure 2, a direct connection is only one connection. As for an indirect connection there are at least two connections (see figure 3). The number of connections in a firm’s network is related to the strength of these connections (Granovetter, 1973). If a firm has a lot of connections, it will be weak connections (Granovetter, 1973). However this is discussed in detail in the next chapter about strength of connections.

Number of direct connections

10

number is dependent on how much actors the firm knows and how much partners it needs for collaboration. For instance a starting small firm has fewer connections than a big multinational firm. Therefore a starting small firm has a smaller network with a smaller number of connections.

If a small firm chooses to use direct connections for its sales network, the number of customers is also the number of connections. As can be seen in figure 4, the small firm has three customers and therefore three connections in its sales network. This number gets bigger as the small firm grows and increases its number of customers.

Number of indirect connections

A firm can also use indirect connections with intermediaries to connect to their partners. As stated before, with an indirect connection there are at least two connections needed for a firm to connect to the actor it needs. In a situation of indirect connections a lot of possibilities are possible regarding the shape of the network and its connections. The number of connections is still dependent on the number of actors the firm knows and needs for collaboration, but also on how many intermediaries are used. The usage of intermediaries is influencing the number of connections. For instance is one intermediary active in one area or in several areas? Or are several intermediaries used for one area? Veena et al (2011) argue that there should not be too much intermediaries, as they drive costs up and therefore the product gets more expensive. However, the intermediaries also should not have too much customers or a too large area. Because it then gets too much for one intermediary. So, the number of intermediaries needs to be balanced to fit into the network.

In a situation of indirect connections not only the number of customers the firm knows and needs are important, but also the intermediary is influencing. A small firm’s sales network also deals with these variables. It is dependent on the number of customers it knows and needs and also on its intermediaries. For instance, if a small firm has three areas with customers,

it can use one intermediary for all areas. But it can also choose to use one intermediary per area and thus use three intermediaries (see figure 5). In the situation of three intermediaries there are more connections in the small firm’s sales network than if the small firm chooses to use one intermediary.

Number of mixed connections

Another possibility is a combination of direct and indirect connections. In this situation a firm uses direct connections to its partners as well as intermediaries to connect to its

11

partners. Therefore an enormous variation of number of connections is possible in mixing these connections.

Mixed connections are also possible for a small firm’s sales network. In figure 6 an example is shown. The small firm has a direct connection with the customers in area 3 and is connected by intermediaries to the other customers. The three figures in this chapter show the options of how a small firm’s sales network can be arranged, however there is an enormous variation in number of connections in these networks. The number of connections and structure of the network is influenced by the number of customers a small firm knows and needs and also dependent on the numbers of intermediaries it uses.

Figure 6: Mixed connections Strength of ties

Closely related to the number of connections is the strength of these connections (Granovetter, 1973). As stated before, connections can also be named ties, which is used from now on. For this research it is important which kind of tie is used in which situation and which fits best in a small firm’s sales network. The strength of a tie can be defined as a combination of the amount of time, the emotional intensity, the intimacy and the reciprocal services which characterize the tie (Granovetter, 1973).

Strong ties

Each type of relationship has a different strength of tie. A strong tie is whenever there is a relationship with a lot of trust among the partners, they are helping each other more and a lot of exclusive information is exchanged (Granovetter, 1992; Hansen, 1999). Strong ties are more approachable, more reliable, and may ensure a higher quality in the transmission of tangible and risky resources according to Berrou & Combarnous (2012). Strong ties allow for greater volume of resources to move between actors (Podolny, 2001). Actors of strong ties are also willingly to take time to carefully explain, detail, or listen to novel or complex ideas (Granovetter 1985; Uzzi 1996; Hansen 1999; Moran 2005).

12

therefore share exclusive information and help each other out (Besanko et al., 2010). In figure 6 an example of a small firm’s sales network is shown. In this figure there is a direct connection between the small firm and the customers of area 3. In theory a strong tie is possible between these actors, if they decide to share exclusive information and trust each other. This is dependent on the customer’s needs. If the customer values a strong relationship and trust in the selling small firm, a strong tie is recommended. Furthermore figure 6 shows also indirect connections via intermediaries. These connections can be strong ties as well. Parag et al. (2013) found out that intermediaries can have a lot of information exchange, which also relates to a strong tie. Therefore the connection between a small firm and its intermediary can be a strong tie, as well as the connection between the customer and the intermediary. The small firm can also decide to share a lot of exclusive information and tend to help the intermediary, in an effort to get the intermediary to sell its products. Therefore a strong tie should work for a small firm’s sales network if the actors benefit from it.

Weak ties

A weak tie on the other hand connects otherwise socially isolated groups and therefore creates more diversity of partners and information in your network (Granovetter, 1973). This helps to have more new and diverse information. According to Kenny (2009) weak ties are ‘local bridges’ to distant others possessing unique information. Furthermore, Granovetter (1995) found out that weak ties play a crucial role in the circulation of and access to information, such as in the labor market.

As weak ties are helping small firms to get access to new information, it is assumed that weak ties are positive related to a small firm’s sales network. In this situation not a lot of exclusive information is exchanged and the relationship is somewhat superficial. However, if the customer is for instance interested in product-related needs (price or quality of the product), there is no necessarily need for a lot of exclusive knowledge sharing. In this situation a weak tie suffices. Another reason for a weak tie is that an actor in general, tries to get the best efficiency from an effort as small as possible. For instance, an intermediary that tries to sell his product with as few effort and knowledge as possible. Therefore the relation between a small firm and an intermediary could fit with a weak tie. The last reason for small firms to use weak ties is because it costs time to build a good relationship and also to maintain the relationship costs a lot of time (Brass, 2012). The small firm must have enough time and resources to support strong ties. All these arguments support that a small firm could use a weak tie for its sales network.

Combinations of weak and strong ties

13

al. (2000) found a distinction between strong and weak ties and when it is favorable to use them. They stated that strong ties are favored in a situation of high levels of exploitation and weak ties in a situation of high levels of exploration.

A small firm however, cannot have only strong ties. As Brass (2012) stated that strong ties demand time and money and small firms have fewer resources (Besanko, 2010). Therefore a lot of strong ties are not a possibility for a small firm. A combination of strong and weak ties therefore suits a small firm better. A small firm should estimate which tie fits better for their connections with their customers and/or intermediaries. The needs of the actors are decisive in this process, as they have to work together and try to fulfill their needs. The customers’ needs are in particular important for choosing the strength of tie. As a small firm needs to fulfill customers’ needs in order to sell products and to survive. Therefore it is suggested that the needs of actors in the small firm’s sales network are decisive in determining the strength of tie of a connection.

Centrality of an actor

The last property of a network which is discussed is the centrality of the actor. This can be defined as the reflection of an individual’s position within the global network (Trefalt, 2014). Degree centrality is the most basic of all centrality measures, it refers to the numbers of ties an actor has with other actors (Zaheer et al., 2010). It can be split up in two forms: out-degree centrality and in-out-degree centrality (Ho et al., 2014). Out-out-degree centrality is the rate of seeking connections with others and in-degree centrality is the rate of how much other partners are seeking connections with your firm.

Benefits of centrality

An actor with a high degree of centrality is in direct contact with many other actors, is recognized as a major channel of information, and thus is highly visible and prominent (Wasserman & Faust, 1994). There are a few benefits of network centrality. It brings access to and control over resources (Hinnings et al, 1974; Tsai, 2001). Centrality also plays a critical role in perceptions about acceptance, access to information, autonomy and support for risk taking (Ibarra & Andrews, 1993). By taking a central position in a network, a firm can adapt more to the market and the other actors in the market, which helps in the nowadays globalizing and changing economy.

14

firm is a central actor; it is connected to all the customers, direct or indirect through intermediaries. In these figures the customers are not central actors, as they are only connected to the small firm. Whenever a small firm is a central actor in its network, it brings access to and control over resources (Hinnings et al, 1974; Tsai, 2001) and also plays an important role in perceptions about acceptance, autonomy and support for risk taking (Ibarra & Andrews, 1993). All these benefits can help a small firm with its sales network. For instance, more information and resources help a small firm. As small firms have fewer resources than big firms. Furthermore acceptance could also help a small firm’s sales networks, as customers accept the small firm easier as a partner. Therefore in order to reach the right customers and resources, we assume that a small firm has to be a central actor in its sales network1. To become a central actor, the small firm should create in- and out-degree centrality; seek contact with customers and have customers that seek contact with the small firm.

Obstacles in shaping networks

As discussed before there are several network properties that are important in shaping a network relation. During this process of shaping a network relation there are several obstacles a small firm has to deal with. There are three major obstacles: choosing the right partner(s), adjusting the coordination and communication and overcoming the problem of trust. Every small firm has to overcome and manage these three problems well when forming a network relation. Whenever these are managed well, it can lead to a relationship between the actors.

Partner selection

The first obstacle which is discussed is the partner selection. De Meyer (1999) mentions that it is important to select the right partner because it influences performances and it influences your image as well. Kale & Singh (2009) mention a couple of criteria helping in selecting the right partner. A partner should for instance bring in special resources. Furthermore if the work culture and ethics are the same, there is more chance of success. The last criteria is partner commitment, if this is higher a relation has more chance of success.

A small firm has to overthink wisely which customers it selects for its sales network. As a wrong choice can have major consequences. For its sales network, a small firm can have two sorts of partners; customers and intermediaries. For both it is important to select the right partner in order to succeed. However, both sorts of partners demand different requirements. An intermediary has to sell the product to the other partner; the customer.

1_{Side note: there is a difference between direct and indirect connections, as with indirect connections there is}

15

The three criteria of Kale & Singh (2009) can be used by a small firm in selecting partners for its sales network. For instance a customer brings in money and sometimes other resources to exchange, which are important for the small firm. On the other hand, a small firm brings in a product which is required by the customer. If the customer and small firm have the same work culture and ethics, they communicate easy and work well together. The last criteria of Kale & Singh (2009) should also help for small firms in selecting their customers. If the partners are dedicated towards each other, they help each other a lot which benefits the relationship. If a small firm uses these criteria in selecting customers and intermediaries it should help the small firm select the right partners. However not every partner is the same and requires the same effort. Therefore these three criteria could be used as guidelines for small firms in selecting partners, but are not binding.

Coordination and communication

After the partner selection, another major obstacle to manage in order to create a network relation is the coordination and communication between the partners. Without coordination and communication a partnership cannot exist. According to Schreiner et al. (2009) the coordination between partners is the glue that holds the partnership together. Perez et al. (2012) found out that conflicting or overlapping goals and commercial objectives of partners lead to failures in partnerships.

For small firms it is important that there is proper coordination and communication towards its customers and intermediaries in their sales network. As a network relation can lead to failure without the right coordination and communication between its partners. For a network relation it is therefore important that both sides of the relation know exactly their responsibilities and who does what. If the small firm and its intermediary have conflicting goals about how much to sell to a customer, the collaboration could lead to failure. Therefore it is very important that the small firm and its partners coordinate who does what and communicate this clearly among each other to prevent conflicting goals or actions.

Trust

The last obstacle in forming a relation is trust. Duysters & Sadowski (2008) found out that a badly managed partnership without trust and goodwill between the partners can lead to a failure of the partnership. Das & Teng (2000) argue that a sense of trust between partners is essential for smooth relationships. High trust activates certain structuring and mobilizing mechanisms that improve social properties for the network of actors performing trading activities in a way that enhances their work performance (Katsikeas et al, 2009).

16

strong tie is based on a high level of trust between the partners. Strong ties are therefore assumed to help in overcoming trust problems and improving performance when forming a network relation. A weak tie also contains trust, however a lower level. These networks relations can also be successful. However, there should then be no specific need for a high level of trust. For instance in a situation in which there is only a basic exchange of resources. All in all, some relations need more trust and commitment than others. This is possible by building strong ties with these partners.

Until now we have discussed several properties of the structural network theory, which are necessary in order to shape a sales network for a small firm. Further we also have discussed some obstacles a small firm has to manage in order to form and maintain its sales network. These aspects are influencing all small firms’ sales networks. However, in this research an international sales network is chosen to be researched. Therefore the next paragraph discusses which influences an international relation has.

Internationalization

An international relation is different from a national relational. In the introduction of this thesis there was already stated that some problems come up with international relations. An example is that international relations contain more uncertainty (Angué & Mayrhofer, 2010). In this chapter the influences of internationalization on the relations abroad are discussed. Internationalization can be defined as the way in which firms become increasingly involved in international activities (Andersson, 2002). In the nowadays times the national borders are becoming more irrelevant (Kenny, 2009), this is caused by the technological progression and the transparent information sharing. A firm can now sell or work together easier with partners all over the globe.

Distance

17

The distance of international relations has also influences for an international sales network of a small firm. As a small firm sees its partners less often, the communication and coordination are also harder to settle for small firms in international networks. Small firms should adjust to this. For weak international ties the distance is not directly a problem. As in these relations less information is exchanged and a lower trust level is established between the partners. Creating strong ties with customers abroad is harder, as small firms cannot exchange exclusive information face to face and it is also harder to create a feeling of trust. Local intermediaries can be a solution in creating strong ties with customers, as they can still see customers often face to face and create a bond. Therefore it is assumed that small firms use a lot of indirect connections in international sales networks. However this intermediary should be fully trusted, as he is also abroad and therefore harder to contact.

Trust

Related to the problem of creating a strong tie with its international partners, a firm also has a problem in creating trust with its partners. Das & Teng (2000) stated that a sense of trust between partners is essential for smooth relationships. In international co-operation it has been noted that trust is crucial but also most problematic. Because the partners come together with different goals and personalities, as members of different organizations and different institutional backgrounds, and may have very limited knowledge about each other initially (Child 1998). As a consequence of all these differences it is harder to create a feeling of trust between partners.

As trust is crucial in international co-operation, it is also important for a small firm’s sales network. Small firms perceive more differences with its customers in international relations. This is because the partners come together with different goals and personalities and limited information about each other (Child, 1998). In order to create a relation with trust, small firms should coordinate and communicate clearly with its customers. This is necessary in order to talk through all these differences and adapt to them. Kenny & Fahy (2013) found that strong ties and trust were positively associated with international performance. It should therefore be assumed that a small firm should try to create trust with its customers abroad in order to perform well.

Culture

18

same work culture and ethics of two partners is beneficial for the success of a partnership. Hofstede (1989) agrees on this and states that culture must work for and not against.

The aspect of culture should never be overlooked in managing an international relation (Hofstede, 1989). Therefore a small firm should also take it in account, when shaping an international network. If a small firm tries to network with a customer on the other side of the world, there are differences between the cultures of these countries. For instance a Western small firm that is doing business with a non-Western customer. This could lead to collisions in its collaboration as they have different methods and habits. Therefore these differences in culture should be minimalized by the partners. This can be done by creating insights in the culture of the other (Hofstede, 1994). By using linking pins in these cultures this can be achieved (Hofstede, 1989). For instance through a small firm that informs with locals and uses them to learn about and adjust to the culture (these linking pins could later on be the intermediaries for the small firm if it decides to sell to customers indirectly in that country). Another option is, whenever the differences are too big to adjust, to not partner up. Because there is a too small perspective of success. All in all it is assumed that small firms, which collaborate abroad, should try to adjust to the differences in order to minimalize these differences between its own culture and the partner’s in order to network abroad or decide to not partner up.

Conceptual model

From the literature review we can derive certain relations between network properties and a small firm’s sales network. We have combined these relations to a roadmap, which can be seen in figure 7. The first relation from the literature showed that both, direct and indirect, connections had positive influences for a small firm’s sales network. Both connections also had a few disadvantages (for an overview see table 3). With a direct connection, the small firm itself focuses on the customer and with an indirect connection there is an intermediary that focuses on the customers of the small firm. We found more positive arguments for an indirect connection than a direct connection, suggesting that an indirect connection works better for a small firm. However, sometimes customers prefer direct contact with the small firm. Therefore we suggest a situation with indirect connections with a possibility to a direct connection, will work best for a small firm’s sales network.

19

the number of connections is higher. Veena et al (2011) stated that intermediaries cost money, so there should not be too much of them. However too much customers for one intermediary does not have the right result as well. Therefore balancing the number of intermediaries is important, whenever intermediaries are used.

Related to the number of connections is the strength of ties. The literature showed that both, strong and weak ties, have their benefits for a small firm’s sales network. Strong ties have more exclusive information exchange and trust (Granovetter, 1992; Hansen, 1999), which is positively related to performance. However strong ties cost more time and resources to maintain (Brass, 2012). Small firms therefore cannot have a high number of them. On the other hand, weak ties lead to new insights (Granovetter, 1973) and are easy to maintain. Small firms can therefore have a higher number of weak ties. The needs of the customer and the other actor of the connection are important for the strength of a tie. For instance if both actors are not interested in a lot of information exchange and trust, a strong tie is not necessary. A combination of strong and weak ties is suggested for a small firm’s sales network. As strong ties have more benefits but cannot be used in high numbers by small firms. Therefore they could be supplemented with weak ties.

The last property of networks discussed the centrality of an actor. Whenever a small firm is central in its network, it has a lot of connections towards its customers in its sales network. The literature shows that being a central actor has a lot of benefits in a network. Central actors have more access to and control over resources and information, and furthermore play an important role in perceptions about acceptance and autonomy (Hinnings et al, 1974; Tsai, 2001; Ibarra & Andrews, 1993). A decentralized firm does not have these benefits. Therefore it is assumed that a small firm should be central in its sales network.

20

21

Methodology

This research is based on the problem solving cycle (Van Strien, 1997). In this kind of research, a problem is found in the practice which needs to be analyzed and solved. There is chosen to use an in depth case study to research this problem. The firm Verbruggen BV is a small Dutch firm with fifty employees. It produces and sells palletizing solutions to other companies in the industrial and agricultural sectors. It started selling in the Netherlands, however since 1996 it also sells outside the Netherlands. Verbruggen used to sell abroad via intermediaries, which they called ‘dealers’. However the firm had problems with its ‘dealers’ in Australia. The last couple of years Verbruggen had no sales in Australia anymore. Therefore Verbruggen wondered about how they had to set up their international selling relations to prevent this in the future (more information about Verbruggen is in Appendix 1). Therefore this research investigates the following research question: How to shape an

international network relation for a small firm based on network properties?

22

Source Volume Purpose

Literature review 3 books

1 annual report 48 academic articles

Provide information available on the topic from the literature and make suggestions towards the problem

Interviews with Verbruggen 1 with the founder

1 with the general manager 3 with sales people

2 with service people

Provide insights about how Verbruggen sees the problem of shaping an international network Data from Australian

partners

Findings of 31 interviewed customers in Australia Findings of 1 interviewed intermediary in Australia

Provide insights from the customers’ and

intermediaries’ side about their international relations with Verbruggen

Secondary data about Verbruggen its network

Numbers and data found about Verbruggen its network

Provide numbers and other specific data about how the networks of Verbruggen are shaped at this moment

Table 4: Overview of the collected data

Analysis & Results Verbruggen

Research setting

Verbruggen is a Dutch company that sells palletizing solutions to other companies in industrial and agricultural sectors. It started selling their machines in 1991 in Holland. Since 1996 it also started selling machines outside the Netherlands and has these days a worldwide network of customers. One country where Verbruggen sells, is Australia. It is their fourth biggest market worldwide. However the connection between Verbruggen and Australia is not going so well. Australia is on the other side of the world and Verbruggen cannot visit Australia every day. The sales of Verbruggen in Australia have declined to zero during the last couple of years. This is caused by problems that Verbruggen faced during these last couple of years with its connections in Australia. They sold via intermediaries in Australia, however during this partnership there were some problems with these intermediaries and the sales process. These intermediaries are not selling anymore for Verbruggen. Therefore Verbruggen is wondering now, how to set up their connections in Australia. They have doubts how to structure their network, for instance if they need to use direct or indirect connections with their customers. Or how they should organize their bond with the customers and other actors in their network.

Data gathering and analysis

23

sales network in Australia. These interviews were with the founder, the general manager, three with sales people and two with people from the service department. There was also information gathered from the perspective of customers and dealers inside Australia. This was done in order to get multiple views on the situation, which increases the reliability and validity. There was information gathered from thirty-one customers. These customers were interviewed by two other students about their experiences with the sales and service process. One of the two intermediaries in Australia, which sold products for Verbruggen, was also interviewed by these two students. Furthermore there were gathered some specific numbers and data, which were provided by Verbruggen. This was done to supplement the findings with data that did not come forth in the interviews with employees of Verbruggen nor in the interviews with actors from Australia. After gathering all this data, the data was studied and organized. The views of Verbruggen were combined with the views of the customers and intermediaries in Australia, to create a clear view of the whole connection between Verbruggen and Australia. This is presented in the next paragraph about the structure of the network of Verbruggen in Australia, which is based on the structural network theory. Also the obstacles and problems from the sales and service process which were perceived on both sides were studied. These are presented in the part after the structure of the network.

Analysis, examples and results

The structure of the network

Verbruggen has nowadays a worldwide sales network. One of the markets in which Verbruggen sells its machines is Australia (New Zealand is put under this as well). This sales network contains three sorts of actors; Verbruggen itself, their customers and intermediaries that are selling for Verbruggen. In figure 8 a connection for a customer in Australia is shown. The customer has direct contact with the local intermediary, who sells Verbruggen machines as a representative in Australia for Verbruggen.

Figure 8: A customer connection in Verbruggen its sales network in Australia

Customers

24

Australia, which can be seen in figures 9 and 10. These areas are densely populated. Furthermore there are also some potential new customers interested in the machine of Verbruggen. The customers can be divided in two markets; the industrial market and the agricultural market. There is a wide range of customers. They are active in all sorts of business; for instance seeds, coal, onions, potting soil or potatoes. All customers have more or less the same needs. They want a good

machine, which is working well and has little mechanical issues. Furthermore, service and contact is important in this business. As it is a complicated machine, the customer wants to be well informed and needs a contact that can provide fast service if the machine breaks down. For instance for the repair of a mechanical deficit or for the order of a specific part. Verbruggen its customers were sometimes unsatisfied about the provided service; it was too slow or the wrong parts were provided. Therefore some customers do not want to buy a Verbruggen machine anymore. This shows the importance of fulfilling the needs of the customers in order to maintain them.

Connections and intermediaries

Verbruggen used intermediaries for its connections in Australia and thus indirect connections to their customers. In figure 8 it is shown how a customer connection is built up. Verbruggen used several of these connections. We found out that Verbruggen used one intermediary, first APF and later EDP, that sold machines for them in Australia. In figure 11 this is shown (the

Figure 11: Sales network of Verbruggen in Australia Figure 9: Customers in Australia

25

only difference is that there were forty-two customers). Verbruggen chose to use indirect connections because the distance between Holland and Australia was too big. Verbruggen cannot visit all these customers on a regular basis. Furthermore the intermediaries, which Verbruggen called ‘dealers’, had already some connections and possible customers in Australia. However after a while it turned out there was a problem with the intermediary in Australia; he failed to arrange the service and maintenance for most of its customers. Therefore some customers contacted Verbruggen via direct connections to arrange the service and maintenance. This created a

situation of mixed connections (see figure 12). Furthermore it was found that the sales network of Verbruggen in Australia contained a lot of connections. APF had about two hundred and fifty contacts with customers and potential customers. EDP had a smaller network with customers interested in a Verbruggen machine. Not all of these contacts became customers of Verbruggen, as Verbruggen sold to forty-two customers in Australia. But it shows

that there are a lot of connections in a small firm’s sales network.

Strength of ties

The relations in the sales network of Verbruggen in Australia were overall weak ties in which there was few information exchange, a low feeling of trust and bad communication. This does not fit the market and product of Verbruggen. As the machine is a real complicated product which needs a lot of communication and service and therefore requires strong ties. It was found that the connection between Verbruggen and its first intermediary, APF, was a weak tie with too few communication. It started off well with commitment towards each other; APF wore shirts with Verbruggen logos on it to fairs. But this strong tie did not hold. This was due to a lot of miscommunication, bad coordination and a decline in the feeling of trust. In the end it led to a relation with barely contact. The same was found for most relations between customers and APF. In the beginning there was a lot of contact and trust between the actors; the relation looked like a strong tie. However over time the agreed service was not done properly. After that, customers had few contact or no contact at all with APF. The customers had no feeling of trust anymore and also did not exchange any exclusive information anymore. With the second intermediary, EDP, Verbruggen had more information exchange. However EDP had not much contact with customers and was not active in selling palletizing machines for Verbruggen. There was overall a lot of miscommunication, bad coordination and low levels of trust, which led to weak ties for Verbruggen in Australia.

26 Centrality

It was found that Verbruggen has a reasonably central position in its network in Australia. Verbruggen has a good reputation in Australia. However it had some troubles being visible for customers, as they had troubles in contacting Verbruggen directly (although there was a sticker with contact details on the machine). To improve their central position, Verbruggen worked on improving the connection to all their customers and also towards potential customers in Australia. Two students were sent to visit all the current customers and some potential customers and to hand them contact details. Some customers, that did not know how to contact Verbruggen before, contacted Verbruggen right afterwards. Furthermore it was found that Verbruggen its sales network has both in-degree and out- degree centrality. Customers are interested in contacting Verbruggen for their machine and also for the service part. On the other hand, Verbruggen also has out-degree centrality. It promotes itself on fairs towards customers of Australia and it sent two students to Australia to gather information and opinions from their customers about the sales and service process. These two combined lead to more access of information and customers also accept Verbruggen easier.

The obstacles and problems of the network

Verbruggen has had some problems with their network in Australia. These problems led to a sales decline from a peak of ten machines sold in Australia in one year, to a point of which there were sold zero machines in one year.

Culture

27

the interviews showed that this is rude in Australia. Therefore they pay for instance by check. These differences in cultures can lead to collisions, if the partners do not have knowledge of each other and therefore do not adjust to each other

Distance

There is a big distance in kilometers between Verbruggen and their customers in Australia. In most of the interviews the distance was mentioned as a problem for the network of Verbruggen in Australia. As Verbruggen is located in Holland, it cannot visit all of its customers on a regular basis in Australia. This leads to less face to face contact with the customers in Australia. Therefore “the contacts are a bit superficial” according to Alex. This does not fit the business of Verbruggen, because the machines and service need good contacts with a lot of information exchange. Even though the technology has developed greatly and there are new ways to communicate digitally, the interviews showed that there are doubts whether technology is the solution for the distance problem between Holland and Australia. It was for instance found that not all customers in Australia have access to proper internet. Furthermore contacting by phone is really expensive. The distance also influences the service from Holland to Australia. As sending spares takes about eight days on average. Furthermore Ton told that it is hard to communicate with Australia because of the time difference, whenever a day starts in Australia a day in Holland is almost over. All of this makes the international relation between Verbruggen and Australia a lot harder.

Partner selection

28 Coordination and communication

There were a lot of problems with coordination and communication for Verbruggen in Australia. It was found out that there were troubles with communication and coordination between Verbruggen and its intermediaries. An interview showed us an example in which Verbruggen sent a mechanic from Holland and he would fly on the 25th to Australia. APF told its customer that the mechanic would be with the customer on the 25th. This is just one example of miscommunication and bad coordination; there were a lot of other examples between Verbruggen and its intermediaries. But also between intermediaries and customers there was bad communication and coordination and even sometimes between Verbruggen and its customers. This does not fit the branch of palletizing machines. Communication and coordination are really important, because the palletizing machines are expensive and there is need for a lot of service. Before a sale there is already need for good communication and also afterwards there is need for coordination and communication about the service and maintenance. It was found that APF provided good communication towards the customer before the sale, however APF had a lot of miscommunication or no communication at all to the customer after the sale. Verbruggen tried to fill that gap by doing the service itself. However this also did not work out perfectly, as some customers were unable to reach Verbruggen. Interviewee Wouter stated during the interview that: “the success of a relation comes with the communication”. This is a lesson that can be learned for Verbruggen from its communication and coordination in the past.

Trust

29

Discussion

The question with which this research started was: How to shape an international network relation for a small firm based on network properties? With this research we have found some interesting information to answer this question.

We found out that there is no type of connection better in general for a small firm. The theory suggested that indirect connections would work better. However we found out that this is situation dependent; for instance an emerging country with a lack of knowledge of complicated machines is not suited for indirect connections. For the situation of Verbruggen we suggest to use indirect connections again, because there is need for a lot of contact and information on short time basis in this branch. Furthermore there can be some customers that want a direct connection with Verbruggen. This should be possible, but it will be hard to arrange from Holland.

Furthermore we saw that there is not an optimal number of connections for a small firm’s network. It is dependent on the number of customer a small firm knows and needs, and on the number of intermediaries it uses. This is exactly what was suggested in the theory as well. Therefore a lot of variations are possible. It is important for Verbruggen that there is a number of connections that creates enough revenues for the small firm and is also within the limits of the firm.

For the strength of tie, the theory suggested that strong ties were better. Although it was stated that a small firm could not have a lot of them because of a lack of resources. Therefore the theory suggested that a combination of weak and strong ties would work best for a small firm. We found out that that strong ties are not necessarily better. In the industry of Verbruggen there is need for strong ties, as it such a complicated machine. However if it is a basic product, there is no specific need for strong ties with every customer. Furthermore the combination of weak and strong ties is also not necessarily the best option for a small firm. A small firm could have for instance enough resources to have only strong ties. For the situation of Verbruggen, an industry in which there is need for a lot of information exchange and trust, there should be strong ties. However it is not possible for Verbruggen to have direct strong ties with all their customers. Therefore the suggestion of using indirect connections with some direct connections is suited. This way all connections of Verbruggen itself, towards its intermediaries and some customers, still can be strong ties.

30

Based on the literature and findings, we made a situation which would be best for Verbruggen in Australia; figure 13 shows this. There are indirect connections, combined with a rare direct connection. All the connections are strong ties and Verbruggen is central in its network. There were also some obstacles found, which a small firm has to deal with in shaping a network. The theory already discussed these obstacles. Most of the theory was equal to the practice. However there were also some interesting differences found. According to the theory there are some differences in methods and habits between all countries. This is only partly true; we found out that

most Western countries have a lot of similarities in doing business. Although every country still has a few different habits. It is for instance rude to ask for a bank account number in Australia, while this is normal in Holland. The theory and practice agree on the fact that it is important that a small firm should adjust to its partner and prevent collisions.

Furthermore it was found that the dimension distance indeed disturbs the flow of coordination and communication. In the theory it was stated that the technical progress helps in dealing with this. However it cannot provide face to face talk, which makes it harder to maintain strong ties and communicate in international relations.

The theory and practice agreed as well that it is important to select the right partner. However the three criteria of Kale & Singh (2009), which would help according to the theory, are not sufficient for selecting the right partner. The case of Verbruggen showed that there should be done a lot of monitoring and research before selecting the partners as well. It is furthermore important that the intermediary is chosen based on rational grounds.

There was also agreement between the theory and practice on the fact that coordination and communication are real important in a relation. We found that without coordination and communication a partnership cannot exist and leads to collisions.

Lastly we found out that trust is critical in international relations, both theory and practice emphasize this. We found out that it is harder to reach a certain level of trust with relations abroad. This difference can be explained by the differences in background and culture.

31

Conclusion and limitations

With this research it was investigated how a small firm could shape its international relations. This was based on structural network properties. Furthermore the obstacles a small firm has to deal with, during shaping its network, were researched. In this research there were found a lot of agreements between the theory and the practice; a lot of the suggestions made towards the small firm were confirmed by the case study. For instance the suggestion that indirect connections were more suited than direct connections was confirmed for the situation of Verbruggen in Australia. Furthermore being central and having a lot of connections is important for a sales network of a small firm. The obstacles, which were mentioned in the theory, also had big influences on the network of Verbruggen in Australia. Trust was for instance an important issue in the network in Australia. Furthermore the obstacle of creating proper coordination and communication was shown to be important, as Verbruggen had problems with its intermediaries in coordinating the process and communicating. However there were also some differences between the theory and practice. Not all business environments are suited to indirect connections for example. Furthermore the theory suggested to use a few strong ties combined with weak ties, as small firms have not enough resources to maintain a lot of strong ties. However in the business of Verbruggen strong ties are needed, because of the complicated machine. These examples show that making general statements for a small firm’s network is not really possible. As these dimensions are dependable on the situation; the business and the environment of the small firm are decisive in shaping a network relation. Therefore we also cannot provide a solution for shaping international network relations in general for small firms, because it is dependent on a lot of variables and influences. However we made some suggestions for the sales network of Verbruggen in Australia (see the next page).

Limitations

32

Suggestions for the sales network of Verbruggen in Australia

In order to shape the network for Verbruggen in Australia. We have come up with some suggestions based on the theory and the data found about the former network in Australia.

1. Fulfill the need of service better

In this business there is need for a proper machine and a lot of service, because of the complicated machine. As the theory discussed, it is important to fulfill these needs. With the former partner APF this was not done sufficient. A lot of customers had complaints about the service and went to a local mechanic to repair the deficit. The customers that were helped had also problems with the speed of repair. A quick service is appreciated by the customers. These service needs can be solved by using intermediaries that arrange the service aspect properly. The people that provide the service should know in detail how the machine works. Furthermore this service should be done by several people. As Australia is big, the people that provide service should be spread in order to provide quick service.

2. Select and use proper intermediaries

To arrange the relations with the customers in Australia, indirect connections with intermediaries that are selling and providing service towards the customers are suggested. The theory showed that indirect connections have a lot of benefits (table 3). Furthermore the distance is too big for Verbruggen to arrange it from Holland itself. The intermediaries also have their own network of people and know the cultures in Australia better. There should be several intermediaries selected spread over Australia, to reach more customers. As the south and east of Australia are densely populated, this should have the focus. One thing that has to change compared to the two former partners in Australia is the selection. This should be done with a lot of research and the partner should be chosen based on rational facts. There should be a lot of monitoring in order to see if the partner fits with Verbruggen and is accountable for the job. Furthermore there should be a clear agreement with which responsibilities the partner has to fulfill. If the intermediary fails to perform its responsibilities, measures should be taken which could lead to the search for a new partner.

3. Offer the possibility for direct connections