INTERNATIONALIZATION OF COMPANIES WITH DIGITAL PRODUCTS

Transcription

1 INTERNATIONALIZATION OF COMPANIES WITH DIGITAL PRODUCTS Digital internationalization tool Bachelor Thesis By: Klaus Andersen Supervisor: Jonas Hedman IT-University of Copenhagen, Global Business Informatics

2 Indhold Introduction... 2 Problematizing the area... 2 From a framework to a tool... 3 Research question... 4 Method... 4 Internationalization theory... 4 Internal organizational culture... 5 Cultural difference... 6 Environmental and legal difference... 8 Market knowledge... 9 Strategic considerations...11 Strategic competence...12 Summarizing table of factors...13 Classification of Information goods...14 Hui & Chau s framework for classifying digital products...14 Delivery mode, granularity and trialability Digital internationalization tool...15 Definition of the digital product...16 Technological readiness: infrastructures in the society...16 Tools and utilities...17 Content based digital products:...17 Online services...18 Social / cultural readiness: educational level, Social relational level, economic readiness...19 Content based digital products:...20 Environmental readiness:...20 Content based digital products:...21 Selection of entry mode...21 Digital internationalization tool feedback...22 Definition of the digital product...23 Technological readiness...23 Social, cultural and economic readiness...23 Environmental readiness:...24 General Entry mode feedback...25 Conclusion...25 References

3 Websites...27 Introduction During the past decade the technology have contributed to the globalization, we have seen multinational enterprises working across borders everywhere, and for smaller and medium sized companies the barriers of entering foreign markets has been decreased. At the same time during the past 30 years the internet has arrived and not only contributed to the above mentioned development, but also created a whole new way of making business, E-business. In the tentative years of the internet, innovative businesses started using the internet for selling physical products, businesses like Amazon and E-bay among others was examples of companies that was made in this era. Along with the speeds of the internet has increased, we have during the past 5-10 years seen that a new kind of businesses has been created, businesses that only exist in the digital world, businesses that do not have any physical products or services, but just create revenue by selling digital items or digital services. These companies has a completely different set of rules to follow, when it comes to internationalization, often it is much earlier in the company s lifecycle they start to internationalize, and they do often not need the same sizes of investments to do a successful market entry into a foreign market. Therefore, the question is, if it is the same factors that plays a role, when it comes to internationalization. During this bachelor thesis, I would like to research on the factors that plays a role when companies with information goods enters foreign markets, with different languages, cultures and political systems. I want to create a tool, which can support decision makers and business managers in understanding which circumstances that plays a role when they are expanding their business into foreign markets. I will start out with problematizing the area, and argue why we are in need of such a tool, and then I will make an overview of which theory that exists within the traditional internationalization theory today and after that look into classification of information goods. Finally, I will describe my tool and which factors I have found that plays a role for companies selling information goods, and discuss the feedback the tools gives, in order to support the decision makers. Problematizing the area Information goods has been existing for many years, first in the form of small software programs, later with music and videos, still placed on physical medias. Later as the internet speed has been increased, information goods has more and more been moved over to only exist on the internet, people are no longer watching movies on DVD s they watch it from Netflix, people do no longer listen to music from CD s, they listen it from streaming services like Spotify. Vahlne and Johanson among others writes about the 2

4 differences in countries, how people act differently, due to their different social and cultural backgrounds. Startups and established companies hosted in Denmark, often run into the barrier of country borders since the country has its limited size of a population of 5.4 million people. The limited market potential in terms of size, force Danish business managers in particular to look at internationalization theory, early in the process of running a company. Internationalization theory is not a new field, and theorist constant discussing which parameters and factors that plays a role within traditional businesses, theorists has made frameworks that describes the different factors, such as political systems, economic factors, cultural factors etc. Others have made overviews of which entry modes companies can use, and which strategic considerations that should be made in order to select the right entry mode. These areas is of course interesting in relations to internationalize companies with information goods, but what if it is not the same factors that plays a role? I have been searching for models and theories that could describe the area of internationalization process in companies with digital products, but I have not been able to find anything. From perspective, we need to have such a framework. A framework that can help theorist to understand, which factors and strategic considerations decision makers, and business managers should consider when they are starting to internationalize businesses with information goods. Businesses with information goods, does normally not have the same limits of entering foreign markets, due to the limited investments that should be done, compared to traditional businesses, who often needs to have boots on the ground in a foreign country in order to exist. The production of digital products often has a high level of overhead costs, whereas the variable costs is limited, and therefore it is important to get the products out to as many potential customers as possible, in order to make the best profit out of the business. That will often require that decision makers decides to enter markets, where they have a little or no market experience, which potentially gives a higher risk of failure. These are just some of the reasons why we are need of a solid framework that can helps theorist and decision makers to understand the internationalization of companies with digital products. Digital products is a broad term, which can cover everything from online consultations of therapists to software programs that helps users scanning their computers for viruses. The different types of digital products, has different attributes that needs different strategic decisions, and the framework should be able to differentiate between these attributes. From a framework to a tool My focus in this bachelor thesis, will not be to create a framework that can serve the purposes mentioned above, since a framework will need to be tested and critical reviewed many times before, it can be published and given a trustworthy sign of being a respected framework. I want to create something that can serve the decision makers and business leaders from day one, a tool that can assist them in making the right decisions, and do the right considerations before they enter a new market. A tool that of course take 3

5 the different kinds of digital products into consideration when it advices the managers. This tool and documentation behind, should not only serve the purpose of the managers, but could also serve the purpose of assisting future researchers in defining a framework within this area. The tool should be available free online for business managers and decision makers to use, along with it getting used, I would like to collect the data and discuss their experiences with using it, in order to improve it, and by that getting in a better position for designing a framework later on. Research question The above-mentioned considerations and ideas, has led to the following research question of this bachelor thesis: Which factors plays a role when businesses selling information goods is internationalizing? o How is internationalization seen in the traditional literature? o How is information goods defined? o Which entry modes should businesses selling information goods choose? Method To answer my research question I will make use of existing literature and by that use a theoretical method. I will put my attention to the existing internationalization literature, both for SME s and for MNC s. Since there is no literature available on E-business internationalization, I will use the literature of classifying digital products, and value drivers in E-businesses to identify which factors that differs from traditional companies internationalization process. The approach of basing my bachelor thesis purely on a theoretical method requires a solid base of existing theory. To make sure I have that, I have consulted Lars Molte Jacobsen, external lecturer at CBS with specialty in international trade and foreign trade investment, furthermore I have been searching at all the existing well-known journals, within international trade and management field, to find relevant articles regarding the topic. When I have concluded which factors that plays a role within internationalization of businesses with information goods, I will use the information to create a tool that can assist decision makers and managers in the internationalization process. The tool will ask a set of questions, and depending on the answers, it will give valuable feedback that can be used in the further process. Internationalization theory In this part of thesis, I have collected all the relevant information from the existing theory within the internationalization field of traditional businesses. I have divided the field into five factors, which I will describe more in depth. The five factors is in close relation and often overlaps each other, that means if one is changed, it has influence on the others. The internationalization theory ranges a long way back, but I 4

6 started my journey of looking into it from 1977 where two Swedish theorist, Vahlne and Johanson created the theory, which defined the approaches and theories we use today. The whole idea behind this theory was that companies could not be experts on a foreign market without getting experiential knowledge. The experiential knowledge could only be created through experience in working with the market [Vahlne & Johanson 1977]. The main idea of researching this field has been to understand the range of complexities related to differences in cultures, political systems and economies [Knight 2001]. It is all about decreasing the level of uncertainty that is related to enter foreign markets. I have been through many different theories up through the years, which both applies for multinationals (MNC s) and for Small and medium-sized enterprises (SME s). I have tried to keep my focus in the theory to SME s, but theory in regards to entry modes has not been easy to find, whereas I have been working with theories primarily working for MNC s. However, my primary goal has been to find factors that applies for all sizes of companies, since both small and big companies can sell digital products. Smaller firms are more affected by the globalization, since falling investment barriers makes it easier for them to enter foreign markets, which decreases the advantages MNC s had before [Knight 2001]. I will finalize this part of the thesis with a table where I have summarized all the important factors, in order to give the reader a good overview. Internal organizational culture Internal organizational culture is inspired by the term international entrepreneurial orientation [Knight, 2001], which were introduced in Knights internationalization framework. It was argued that one of the key factors for success in the internationalization process was to have a good internal organization culture. A good internal organization culture consists first of an entrepreneurial mindset in the company s management teams [Knight, 2001]. The company should be proactive and aggressive in entering a foreign market [Knight, 2001] and the company management should be willing to take risk in the entry process. It is important to stress that it is not only the decision makers and the management teams that should have an entrepreneurial mindset, but the whole company s staff, and that is the main reason why I have named it internal organization culture. In the term entrepreneurial orientation lies, also the factor of innovativeness, the management should have an innovative mindset that helps them to create creative solutions to the problems they are facing in a foreign market [Knight 2001]. When creating creative solutions it is implicit that the company is willing to take risk, but when taking risk the size of the gain should also mirror the size of the risk. When working within the international market, it is important to have an international perspective [Rodriguez 2007], that means within the organization it should be tacit knowledge that the solutions created not only fits within the domestic market, this can often be achieved by having management teams 5

7 that have prior experience with international business [Vahlne & Johanson 2007]. Depending on the company s size, this can have different levels of importance, in smaller companies prior experience with internationalization by the decision makers is very important since there is often only a few decisions makers, and the success and international performance is strongly dependent of these. In the internationalization process of family-owned companies, it is often great to have a corporate block as a part of the ownership setup [Fernandez & Nieto 2006], a corporate block is an external company that have bought a part of the family-owned company [Fernandez & Nieto 2006]. Often family-owned companies do not have any prior experience with internationalization, family-ties between the family members in the management of the company can play a role within the decision-making, and that can have a negative impact on the international performance [Fernandez & Nieto 2006]. If the company do not have an innovative mindset, and do not have any prior experience with internationalization, the chances of failure in the expansion is increased. Knight mentioned in his study in 2004 that there is a positive association between entrepreneurship and expansion of strategic activities [Miller and Friesen 1984] and between entrepreneurship and organizational culture [Covin and Slevin 1991; Miller and Friesen 1984]. Cultural difference Cultural difference is one of the most mentioned factors that plays a role within the internationalization literature. Either in the form of physic distance [Vahlne & Johanson 1977, 2009] or in the form of location familiarity [Hill et al. 1990]. Johanson and Vahlne was the first theorists that defined a model within internationalization field in In this model, they created the term physic distance, which was defined as the sum of factors preventing the flow of information from and to the market. Examples of these could be differences in language, education, business practices, culture and industrial development [Vahlne & Johanson 1977]. This proof that already in the early years of working within this field, theorists was aware of the cultural differences. Physic distance overlaps environmental difference, which I describe later in this thesis, but as I see it, it is mostly located within the cultural difference area. Johanson and Vahlne also found that one of the biggest obstacles, when it comes to decision making, when entering a new market, was the lack of knowledge about the foreign country s language and culture. This longer the physic distance was, this harder it was for decision makers to make the right decisions [Vahlne & Johanson 1977]. They argued that knowledge about a foreign country s market and culture could only be acquired through experience in operations [Vahlne & Johanson 1977]. That makes it even more important to have managers that was having the entrepreneurial mindset and was able to make creative solutions in order to operate properly in a new market [Knight 2001]. 6

8 Vahlne and Johanson revised their first model in 2009, here they answered some of the critics about experimental knowledge, and they turned the model a bit around, so cultures and foreign markets was no longer seen as limited within country borders, but was more seen as business networks that easily crossed country borders [Vahlne & Johanson 2009]. They was still referring to physic distance as the difference in culture, but was more looking at the internationalization process as a relationship development, and again this larger the physic distance is, this harder it is to build relationships [Vahlne & Johanson 2009]. Relationships are socially constructed, they consists of intentions, expectations and interpretations [Vahlne & Johanson 2009], and for that reason cultural differences plays a very big role in this process. The cultural differences not only plays a role in the beginning of the relationship building process, but also during the corporation between partners in different countries, this longer the physic distance is, this harder it is to do cross-country businesses in the long term [Johanson & Vahlne 2009]. As mentioned in the beginning of this part, cultural differences is mentioned in almost all the internationalization literature, Brouthers and Nakos calls it behavioral uncertainties, they describe this term as something that arises from the inability of a company to predict the behavior of individuals in a foreign country [Brouthers & Nakos 2004]. In other words, companies cannot predict how people act in foreign countries because they are having a different culture. Like Knight states the importance of entrepreneurial mindset, Brouthers and Nakos states that it is very important to be aware of behavioral uncertainties in Small and medium-sized companies because they tend to rely on managerial abilities of a few decisionmakers [Brouthers & Nakos 2004]. C.W.L. Hill mentions cultural difference in the term location familiarity, which is stated as the perceived distance between the home and host country in terms of culture, economic systems and business practices, this shorter perceived distance, the greater location familiarity [Hill et al. 1990]. Opposite Johanson and Vahlne, he states that location familiarity is a mixture of the perceived distance, and the company s prior experience with internationalization. He argues that it is easier for companies to enter countries with longer perceived distance, if they have experience with entering countries for shorter perceived distance first. As mentioned before Johanson and Vahlne states that knowledge about entering a given market with a specific culture, can only be easier if you have entered the market before, or entered another market with a similar culture [Vahlne & Johanson 1977]. The father of cultural differences, Gert Hofstede has done significant work within this area, where he classifies the five dimensions that can vary in order to define the cultural difference between national countries [Hofstede 1980]. Hofstede has not been mentioned in the internationalization theory I have been through, but I find his dimensions very important in order to understand the difference of cultures: 7

9 Individualism Collectivism: Determines whether the connection between the individuals are strong or weak, and whether the people within the culture has to take care of themselves or the family takes care of them [Hofstede 1980]. Power distance: Describes how broadly it is accepted by the less powerful members of the society, that the power is distributed unequally, and the degree of acceptance that other people has the right to decide over them [Hofstede 1980]. Uncertainty avoidance: Uncertainty Avoidance illustrates whether people need to have security in their job and in the society or not. In countries with strong Uncertainty Avoidance people will always try to minimize uncertainty by making rules and not behave outside these rules to have stability [Ford et al. 2003] Masculinity / Feminity: This dimension shows the approach to life, work and success. Masculinity is more material, where feminity is more the soft values that is important. Pragmatic / Normative: Is about which belief people in the past, as well as today has regarding whether the things happens around them can be explained naturally or not, and whether they understand these things or not. [Gert-Hofstede.com, 2014] Environmental and legal difference Environmental and legal differences refers to the differences in laws, political situations and general environment there is between countries. There is often risk associated with going into markets or countries where the environmental situation is unstable, and for that reason, it is a very important factor to consider before a company enters a country or a market. It is important to be clear about what is exactly environmental factors, but this can be big range of things and it can vary from industry to industry. A company that sells cars, focus a lot on how much duty there is added to the car prices, where a company that sells clothes focuses on how big the level of VAT is. However, equal for almost all companies, is that when they enter new markets, a stable political situation is good for the company. Another external environmental factor is the host country s level of industrial development. This area covers the country s infrastructure level, the level of the country s economy etc. Brouthers and Nakos describe this area with the term environmental uncertainties. Environmental uncertainties describes the risk and uncertainties there is related to the host country environment, for example the ability to enforce contracts and control other types of political and legal risks [Brouthers & Nakos 2004]. When a company enters a new market, it is often allocating a given amount of resources to that specific market; these resources can often not be moved to other markets because they have a certain level of asset specificity in relation to the market. Asset specificity refers to the physical and human resources, which may lose value in another use [Brouthers & Nakos 2004]. These resources is also described by Knight, 8

10 with the term market commitment, which refers to resources dedicated to a given market, especially the ones which cannot be moved to other markets, due to its specialty [Knight 2001]. When companies entering markets with a high level of environmental uncertainties, the level of market commitment and the level of asset specificity plays a significant role, if something goes wrong in the host country or the political situation turns to be unstable, there is a significant risk for losing the complete investment in that country [Brouthers & Nakos 2004]. This bigger the asset specificity the company has, this more the company will suffer from a given investment failure. According to the above mentioned this area is in close relation to the factor strategic considerations, which I will describe later in this thesis, considerations about which market entry mode the company should select, and the size of investment, can have a significant impact on how the company will perform in the future. C.W.L. Hill has categorized the environmental risk of entering a new country s market into four areas, which he summarized as country risk. The first is political risk, which refers to the risks associated with political instability. The second is ownership and control risk, which refers to expropriation and intervention of private property rights. The third is operations risks, which refers to price control and local content requirements of products or services. The fourth and last is transfer risk, which refers to currency inconvertibility risk and remittance control [Hill et al. 1990]. These four environmental variables influences the entry mode decision through resource commitment and strategic flexibility [Hill et al. 1990] and is for that reason again in close relation to strategic considerations. Johanson & Vahlne also briefly mentions the term about environmental factors, but in their first article from 1977, they includes it under the physic distance, and in their article from 2009 they gives the area its own term, namely institutional market knowledge. Institutional market knowledge is knowledge about the host country s language, laws and rules, and it has to do with factors related to the physic distance and liability of foreignness [Johanson & Vahlne 2007]. Which means that it is still not a separated area they weight high, but is included below the two other areas, market knowledge and cultural differences. Market knowledge Market knowledge factor refers to the host country s market conditions, which is about how much knowledge does the company have about the market it is about to enter. Market knowledge can be demand conditions, competitive situation in the given market, economical strengths or weaknesses by the population in the given market etc. As with all other types of ventures, appropriate preparation is key in foreign market entry, [Knight 2001] it is important to do the necessary research about the host country before the company enters the market. This is especially important in resource-poor companies such as SME s since they often cannot sustain a 9

11 prolonged entry process, and for that reason often fails in the early stage due to lack of market knowledge [Knight 2001]. Brouthers and Nakos underbuilds this argument by saying that limited resources for analysis and market research makes it hard to investigate foreign markets and that makes SME s tend to use nonequity mode as their preferred entry mode [Brouthers & Nakos 2004] Johanson and Vahlne is not agreeing with the other theorists in the internationalization theory. They argue that market knowledge about a foreign market can mainly only be achieved through operating on the given market, and categorize such market knowledge as experiential knowledge [Vahlne & Johanson 1977]. The basic assumption of their 1977 model is that lack of market knowledge is an important obstacle to the development of international operations, so that a company needs to allocate some experiential resources to achieve this knowledge, in order to get the expected outcome in a market abroad [Vahlne & Johanson 1977]. The main argument for this assumption is that experiential knowledge provides a framework for perceiving and formulating opportunities. When working with objective market knowledge, which can be achieved without being present on the market, it is only possible to formulate theoretical opportunities. Whereas experiential knowledge makes it possible to formulate realistic concrete opportunities that fits into the future activities [Vahlne & Johanson 1977]. Vahlne and Johanson changed their view on how companies are doing business abroad from their 1977 article to the article they wrote in 2009; in the new article, they see companies as a part of web of many companies. They call this web of companies a business network. When a company then have lack of market knowledge it is not because the company has not done its research, or because it have not invested enough money in getting experiential knowledge, but because they do not have the right position in the business network. They call that the liability of outsidership [Vahlne & Johanson 2009]. So the focus of the company should be not only to get knowledge about the given market, but to get the right connections to companies that is inside the market, and by that acquired the given market knowledge. Opposite their first article they also start to agree that general internationalization knowledge has an impact on this process, which all the other theorists has argued in their studies [Vahlne & Johanson 2009]. It is furthermore argued that trust between business partners can substitute market knowledge, because a trusted middleman can runs a company s foreign business until the necessary business network has been established [Vahlne & Johanson 2009]. Hill has more an investment perspective to market conditions and market knowledge. He is making a distinction between demand conditions and competitive conditions in a new foreign market, and discusses how much a company is willing to invest when they enters the market. According to Hill demand conditions can be unknown or stable. In markets where the demand is unknown or unstable the willingness of the company to invest should be low, due to risk connected with the investment, whereas markets with a 10

12 stable demand it is more secure to do investment and the size of the investment can for that reason be bigger [Hill et al. 1990]. Competitive conditions in the foreign market can be stable or volatile; a volatile market is one where rapidly changing technological, macroeconomic, social or demographic factors are changing rapidly. As long as the competitive conditions in the foreign market is volatile, Hill argues that the company should keep the investments low, and by that keeping the risks low. When the competitive condition becomes more stable, the size of the investment can grow [Hill et al. 1990]. The problem with keeping the investment low is that companies often used licensees to run the business in the foreign market or do a joint venture. If the company has a lot of critical knowledge, which they need to hand over to the business partner, the transaction costs can raise dramatically if the partners chooses to abuse the knowledge [Hill et al. 1990]. I will touch that topic much more in the next part. Strategic considerations The last of the five areas I have found important in the internationalization theory is strategic considerations. This is the broadest part, but also by far the most important one when companies considering entering foreign markets. Strategic considerations refers to how the company should enter the foreign market, the size of the investment, and which strategy that should be used. Market entry is separated between equity mode and non-equity mode. Equity mode is when a company is getting boots on the ground in a foreign market, which means creating foreign offices, manufactures etc. Whereas non-equity mode is where the company drives everything from the home market [Brouthers & Nakos 2004], the non-equity mode does often gives less risks, because the size of investment is more limited when the company can drive everything from the home market [Brouthers & Nakos 2004]. As mentioned earlier in the market knowledge part, SME s often have limited resources that restricts search and investment activities and for that reason selects non-equity mode as preferred entry mode [Brouthers & Nakos 2004]. When considering which entry mode that should be selected, it is important to consider the asset specificity [Brouthers & Nakos 2004] or market commitment [Vahlne & Johanson 1977] in order to be able to move its assets to other markets, in case that the market entry fails [Brouthers & Nakos 2004], that includes material, personal, know-how and other assets [Vahlne & Johanson 1977]. There exists different strategies for how companies can enter foreign markets [Hill et al. 1990], there is difference between hiring locals with local market knowledge, and let foreigners from the home country take over the new market. That includes different levels of risk, control and resource commitment. The first way to do market entry is by doing licensing, this way is also known as franchising [Hill et al. 1990], where the company gives licenses to one or more companies to sell its products or services in a given country or in a given market. The second way is joint venture [Hill et al. 1990], in this form, the company makes a partnership with a local company, and then they together sell and market the products or services 11

13 in the local market. The third and last way to do market entry is called wholly owned subsidiary [Hill et al. 1990], here the company builds everything up itself, and owns the market and sales completely by its own. Hill did identify three different variables that changes depending on which entry method that is selected. The first variable is control, the level of control determines which authority the company has over operational and strategic decision making. In licensing, the control level is low, where in joint venture, the control level is medium, and in wholly owned subsidiary, the control level is high [Hill et al. 1990]. The second variable is resource commitment; this variable refers to the level of resources that the company needs to commit in order to enter the marked. Here Hill is primary talking about dedicated assets or assets that has a high level of assets specificity. Licensing has a low level of resource commitment, joint venture has a medium level of resource commitment and wholly owned subsidiary has a high level of resource commitment [Hill et al. 1990]. The last variable is dissemination risk; dissemination risk determines the risk a company has due to its firm-specific advantages in know-how, and how this know-how can be expropriated by a licensing or joint venture partner. In licensing the dissemination risk is high, where in joint venture the dissemination risk is medium and in wholly owned subsidiary it is low [Hill et al. 1990]. Finally, Hill mentions there is two kinds of strategies, which is possible to use, when you look into a broader perspective with many markets. The two are multi-domestic strategy and global strategy. Multi domestic strategy will favor low control entry modes; here the company is trying to establish itself in many smaller markets, with local departments in all the markets. Where a global will favor higher control, because everything is driven from the home market. That means that all decisions etc. will be made from the corporate office [Hill et al. 1990]. Strategic competence Like mentioned in the beginning, entrepreneurial mindset is key when companies are starting to internationalize, but another important part is strategic competence in the process of internationalize. This is especially important because foreign markets usually involve various uncontrollable challenges not present in the home market, and this less resources the company has, this more important it is to have a management team that makes the right decisions at the first time [Knight 2001]. In the strategic competence lies also the ownership or the risk willingness of the owners of the company. Fernández and Nieto was doing a study around how family owned companies performed in the internationalization process vs. how corporate companies performed. They found that family owned companies was often not having the necessary knowledge about internationalization and for that reason the corporate owned companies was performing better [Fernández & Nieto 2006]. In family owned companies there could also 12

14 be family ties that had influence on the decisions made in the company and the risk willingness was often lower in the family owned companies [Fernández & Nieto 2006]. It is a the same time important for the management team to have an international approach when they wants to be competitive in the international arena, that is not only when the company wants to compete in foreign markets, but also when the company face competition in the domestic market [Rodriguez 2007]. Summarizing table of factors Below I have made a table that summarizes the five factors. Internal organizational culture Cultural differences Also known as: Environmental and legal differences International Entrepreneurial Orientation Entrepreneurial mindset Risk willingness in the entry process Innovativeness International perspective Former internationalization experience in management teams Corporate blocks in family-owned companies has positive effects on performance o Physic distance o Location familiarity o Behavioral uncertainties Differences in o Language o Education o Business practices Cultures are not limited by country borders Gert Hofstede s 5 dimensions Also known as: o Environmental uncertainties Differences in o Laws o Political situations o General environment o Infrastructure Environmental risk o Political risk o Ownership and control risk o Operations risk o Transfer risk Market knowledge Good preparation is key Differences in o Market conditions o Demand conditions o Competitive situation o Populations spending power Experiential knowledge Insider / outsider term 13

15 Trust Strategic considerations Size of investment Strategy for entering foreign market Equity-mode vs. non-equity mode Level of asset specificity Classification of Information goods Market entry strategies o Levels of control o Levels of risk o Levels of resource commitment Multi-domestic vs. global strategy Strategic competence is key Since I have chosen to focus my work on information goods, I will here describe the basic characteristics of these products. Information goods is also known as digital products, digital products refer to any goods or services that be digitized, (converted into a binary format) [Hui & Chau 2002] Typical digital products is software, music, books and online newspapers. Software has always been digital, but before the internet was so broadly used, it was made physical by adding it to discs and even before floppy disks. Digital products exists in many different forms, and a lot of different strategies and price models can be applied to these products, and example of that difference could be the difference of e-books where the value lies in the content, but in software services as Microsoft Word, the values lies in the functionality. Since we already have so many different forms of digital products, and that development continues, Lung Hui & Y.K. Chau found that there was a need of understanding these differences, and for that reason, they created a framework for classifying digital products [Hui & Chau 2002]. Hui & Chau s framework for classifying digital products The digital products is divided into three different categories namely Tools and utilities, content-based digital products and online services where the distinction between them lies in the product attributes [Hui & Chau 2002]. Tools and utilities: Is products that assists users in performing a specific task or reach a specific goal [Hui & Chau 2002]. These products could be software products like antivirus, or Word that helps users create.docx documents. The second product type is Content-based digital products, in these products the value lies in the information content [Hui & Chau 2002]. Examples of such products could be online newspapers, e-books, music and videos. Online services is the last type, it helps users to get access to specific services, or online services that assist users in accomplish specific tasks [Hui & Chau 2002]. Examples of online services could be Skype that helps their users to communicate through the internet, or Asana that helps users perform task management. Tools and utilities and online services, basically seems to have the same 14

16 definition, but the difference between them is that Tools and utilities can be bought, where online services, are services you pay to use, but cannot be bought. A great example of these two kinds of digital products is computer games, here we have traditional computer games, which have been existing during the past 30 years, such as console games and PC games, where you can buy it in the shop and take it home and play it, which is in the category of tools and utilities. Whereas the new kinds of computer games, is games which you only can play online, and cannot be accessed and played without being connected to the internet, these games is in the category of online services. Therefore, the categorization depends strongly of which business model the provider or creator of the digital products selects. Delivery mode, granularity and trialability. Hui & Chau have found three different unique variables that can differentiate in information goods, namely delivery mode, granularity and trialability. Delivery mode refers to how the product is delivered [Hui & Chau 2002]. Tools and utilities and contentbased digital products are often downloadable, here the whole product is delivered at once when the customer downloads it. Opposite in online services, the delivery happens over time when the customer uses the service. Granularity refers to how much divisibility the seller of the digital product has to differentiate the product [Hui & Chau 2002]. An example of how this variable is used is to look at the Office package from Microsoft, where they have a student version, a home version and an enterprise version all of them differentiates in the product mix included. That is due to the possibility they have because of the products granularity. Trialability: refers to how appropriate the product is for doing trials [Hui & Chau 2002]. Trials is done by letting the user try out the product free in a given period or until the customer reaches a given limit. That is mainly used with tools and utilities and online services, like Adobe Photoshop, where you can use it for 30 days before, but if you want to continue, you need to pay for the product. It is not so often used to content-based digital products, because it is more difficult due to its delivery mode [Hui & Chau 2002]. Digital internationalization tool The idea of the tool is that it can help the decision maker in a company that sells digital products, to find out which criteria and factors that he or she should be aware of when he or she is considering to enter a new market. During this part of the thesis, I will refer to a person called the decision maker; the decision maker is the person or group of people that makes the strategic decisions about entering foreign markets with his or their portfolio of digital products. Even though it can be more than one person, in the following I will refer to it as a single person, namely the decision maker. 15

17 The tool is created like an intelligent questionnaire, which is asking relevant questions depending on what is answered before. When the questionnaire is completed, the system will provide a list of factors and criteria s that the decision maker can use in his decision process of entering a new market. The result of the questionnaire is not a blue print of entering the new market, but more as a help to consider the right things in the decision process. In addition, it is not guaranteed that if the factors and criteria s are fulfilled the entry of the new market will be an unqualified success. The questionnaire is divided into four different areas, where it first will help the decision maker to categorize the kind of the digital product, which is sold. Secondly, depending on the first sections answers, it will help the decision maker to find out which technological factors that should be available in the target market, in order to make the product or service work. Third, it will help the decision maker to find out which social, cultural and economic factors that should be fulfilled. Finally, it will help the decision maker to find out which environmental factors and risks there is associated with entering the market. The complete overview of the tool including all questions and guidelines can be found in appendix 1 page 2. Screenshots from the prototype of the tool can be found in appendix 4 page 15. Definition of the digital product Since the target of this tool is focused on digital products, and the internationalization factors varies depending on the type of the digital product, the first part of the tool will be focused on helping the decision maker to define the digital product or service. The decision maker needs to categorize the product within one of the three categories: Content based digital products, tools and utilities or online services. In order to make it as easy as possible for the decision maker to understand the difference I have created the following two questions: Question 1: Is your product or service content based? A: Content based B: Service based In case the decision maker choses A, the product is defined as a content based digital product, but if the decision maker chooses B, a the following question will appear Question 1B: Do your customers needs to be online while they are using the product? A: Yes B: No If the decision maker chooses A, we can define the service as an online service, whereas if the B is chosen we can define the service as a tool or utility. Technological readiness: infrastructures in the society Technological readiness refers to the markets readiness within the technological area that means the markets digital infrastructures and the end user s computer power. Within this area, I have identified that 16

18 the needs for a proper internet connection is different depending on which type of digital product the decision maker is selling. Tools and utilities The tools and utilities type of product is commonly bigger in the terms of megabyte than the other types of digital products. For that reason, the most important part of this is the time it will take for the end-user to download the product, before the usage can start. Therefore, the first questions in this part is: Question 2A: How big is your average product in terms of megabyte? Input field where the amount of megabytes is typed in Question 3A: How long time may it maximum take the end-user to download the product in the terms of minutes? Input field where the amount of minutes is typed in In these two questions, the decision maker states the amount of megabytes their average digital product consists of, and how long time it maximum may take the end user to download the product. On that behalf, the system is able to calculate, which size of internet the end-users should have. The calculations can be found in 3 page 12. In case the internet connection is too slow in the target market, the possibility of distributing the products through physical mediums such as CD s and DVD s still exists, so in the next question the decision maker needs to decide whether he is willing to distribute it through that channel. Question 4A: Is your product appropriate for being distributed on physical mediums? Yes / No Question 5A explorers, which level of computer the end-users in the target market, should have in order to be able to run the software. That is needed for being able to discover whether the end-users in the target market has appropriate computers for running the software. Question 5A: Which level of computer, tablet or similar does your digital product need, in order to be able to run to your satisfaction? Rate from 1-5 where one is a low spec computer and five is a high spec computer 1-5 Content based digital products: The content based digital products varies very much in terms of size and delivery mode, products like books and music is normally smaller sizes, whereas movies has bigger sizes. Some of the newer content-based digital product services, such as Spotify and Netflix has changed the way we consume these kinds of products, before we always downloaded the product to our device, and then played it. These services 17

19 changed the items delivery mode, and therefore we need to find out whether the decision makers products is a download service or purely a streaming service: Question 2B: Is your digital product streamed to the users during usage or is all the content downloaded, and then used. A: Purely streaming service B: Always downloaded and then used In case the decision maker selects answer A: Purely streaming service, they will be asked a follow up question in order to define which kind of internet connection that is needed to stream the content properly. The contents bitrate will be calculated in the feedback to the decision maker and inform him about the minimum needs of internet connection in the target market. Question 3B: What is the minimum streaming rate your product need in order to function properly? Input field where the amount bits is given (P). (P = Pixel pr. Inch) In case the decision maker answer B in question 2B, the questions 4B and 5B which is exact the same questions as 2A and 3A, in order to define the maximum download time which is accepted. Question 4B: How big is your average product in terms of megabyte? Input field where the amount of megabytes is typed in Question 5A: How long time may it maximum take the end-user to download the product in the terms of minutes? Input field where the amount of minutes is typed in Online services Online services does not significantly differentiate from tools and utilities in the way it is downloaded the first time, but the difference lies in the way it is used. So in order to define the maximum download time accepted the same questions as 2A and 3A will be asked here. Question 2C: How big is your average product in terms of megabyte? Input field where the amount of megabytes is typed in Question 3C: How long time may it maximum take for the end-user to download the product in the terms of minutes? Input field where the amount of minutes is typed in Question 4C and 5C defines whether the product is in need of a constant streaming rate, or it is an online application located on a website, which is loaded from time to time. In case the decision maker answers A: yes in 4C he will be asked question 5C, about the minimum streaming rate, which is almost the same as question 3B about the calculation of the streaming rate. 18