These days, more and more companies are “born global” – that is, instead of starting out thinking of their market as merely their city or their country, they look at the whole world and see potential customers everywhere

Criaco, G. (Guiseppe)

Criaco, Giuseppe

EUR Research Repository

ROTTERDAM SCHOOL OF MANAGEMENT, ERASMUS UNIVERSITY The effects of guanxi on employee voiceChris Murray talks with Tina Davidson How big should a young firm think?By Giuseppe Criaco Crowdsourced  consumer data:  how do we make  sure it’s good?By Gabriele Paolacci  Innovation is a  team sportBy Dirk Deichmann The whys and whens of intra-team power strugglesBy Lisanne van Bunderen2nd Quarter 2018Management Knowledge         RSM DISCOVERYwww.rsm.nl/discovery RSM - a force for positive change08  |   2nd Quarter 2018Management KnowledgeRSM DISCOVERYfailure. Are you better off, then, con-centrating on different countries with-in a single region or pursuing multiple regions simultaneously?  As someone who did his graduate work in Sweden and is a specialist in entrepreneurship, I thought Swedish start-ups would be a good population to study for an answer to this ques-tion. Most Swedish companies are born thinking of cross-border sales, and the business culture as a whole is quite adept at global business. Whether the company is Ericsson or Spotify, Swedish multinational companies have histori-cally suffered relatively few of the kind of cultural problems that companies from larger countries deal with as they went global.Tracking start-upsTo find out whether there is a simple rule about the relative value of pursuing an intraregional versus interregional strat-egy, my colleagues Pankaj C. Patel from Villanova University, Lucia Naldi from Jönköping University, and I examined the track record of 680 Swedish born-global start-ups founded in 2002, 2003, or 2004 in the manufacturing industry and followed their survival up to 2010. When we examined how they had performed, we found companies that pursued an intraregional geographic di-versification strategy tended to fare bet-ter than those who diversified broadly globally. Our models showed that in-traregional diversification – broad ex-pansion within a region – lowers the risk of failure, while interregional diversifica-tion – broad expansion across different regions – increases the risk of failure.Considered as a way to diversify risk, an export strategy makes logical sense for young firms, but what kind of international strategy? On the one hand, the kind of textbook step-by-step intraregional geographic diversification strategy (concentrating in a region and expanding within that region) most managers learn at business school has a high opportunity cost.On the other hand, taking on too much at once (by spreading across different regions or pursuing an in-terregional geographic diversification strategy) can easily spread a new com-pany’s resources too thin and lead to The nature of the internet and mod-ern digital communications is driving many global business dreams these days, but many ambitious people in smaller economies, such as Sweden, have always thought this way. In fact, businesses often had no choice: after all, how many of your products can a small market of 10 million Swedes buy?In Sweden, if you wanted to build any real sustained competitive advan-tage, sooner or later, you had to think about markets beyond your borders. From ABBA to Volvo, the most suc-cessful Swedish brands have focused on exports. These days, more and more companies are “born global” – that is, instead of starting out thinking of their market as merely their city or their country, they look at the whole world and see potential customers everywhere.How big should a young firm think?By Giuseppe Criaco2nd Quarter 2018   |   09www.rsm.nl/discovery This was true whether the market at home was volatile or offered steady profits. If the home market is very dy-namic, it demands greater managerial attention than if business conditions were a little sleepier. More attention paired with broad expansion within a re-gion allows for cost control by lowering costs of understanding export require-ments, transportation costs, and logis-tics costs in related markets within a re-gion, further reducing the risk of failure. On the other hand, if the home mar-ket is more predictably profitable, young firms may go abroad with somewhat deeper pockets, which could compen-sate for some missteps derived from broad expansion across different re-gions. Yet our results showed the op-posite: young firms that launched in a favourable home market and still under-took interregional diversification were more likely to fail. In either case, those born-global start-ups that survived tend-ed to be those that pursued an intrare-gional internationalization strategy. Safety firstThis might seem somewhat counter-in-tuitive in the case of the company that is beginning with a favourable home mar-ket. After all, if your local industry pro-vides enough resources to support you and to enable you to grow and prosper, why wouldn’t a broader, more aggres-sive expansion make sense? The reason is that the limiting factor is not cash but execution risk. A relatively small, young firm that expands too far and too fast is likely to run into difficulties in trying to manage all those far-flung outposts. We think there are several reasons this may be the case. For instance, it’s harder to serve dispersed customers at long distance, both for reasons of lo-gistics and market knowledge. On the other hand, shipping to a single region reduces transportation and distribu-tion costs within the countries in that region and improves the return on mar-keting expenses. Concentrating limited resources on distribution and promo-tion enables the born-global to realize a higher return. In cases where goods must sometimes be returned, consoli-dation and proximity may also help re-duce distribution costs.Our research does not establish whether this is equally true for non-manufacturing firms. Software and other virtual goods may well behave somewhat differently. However, al-though they will have fewer logistical headaches, other problems such as regulation and customer knowledge will remain a matter of concern.This conclusion may seem coun-ter-intuitive in an age of instant glob-al communication and artificial intelli-gence, but in the end, businesses are still run by people, and people still have a limited amount of time and energy.  This article draws its inspiration from the paper Geographic Diversification and Survival of Born-Globals written by Pankaj C. Patel, Giuseppe Criaco and Lucia Naldi and published in the Journal of Management, Vol. 44, No. 5, May 2018. DOI: https://doi.org/10.1177/0149206316635251Giuseppe Criaco is Assistant Professor of Entrepreneurship, Department o f  S t ra teg ic  Management  and Entrepreneurship, Rotterdam School of Management, Erasmus University.   EMAIL  criaco@rsm.nl“A relatively small, young firm that expands too far and too fast is likely to run into difficulties…” RSM ExpertiseThe Department of Strategic Management & Entrepreneurship at RSM offers unparalleled exper-tise in a wide range of areas of im-portance to managers and scholars. These areas are grouped under the themes of strategic management, strategic entrepreneurship, and global strategy. More information about the department and its work can be found at:      WEB   www.rsm.nl/sme

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How big should a young firm think?

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How big should a young firm think?

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