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How SMEs are surviving in the face of digital global competition

Digitization is creating many new opportunities for SMEs to become internationally active. But the international competition is growing likewise, says Prof. Dr. Winfried Ruigrok, internationalization expert at the University of St. Gallen. The key to success: A well-honed business model and local networks in the target market.

How SMEs are surviving in the face of digital global competition

Dr. Ruigrok, what are the typical pitfalls in the internationalization process? 

One of the main stumbling blocks is lack of involvement of the CEO or the Executive Committee in internationalization projects. Less because of his authority, but because he has the vision and commitment to answer the question: How can we evolve without sacrificing our identity? Internationalization processes also often lack human and financial resources and a comprehensive understanding of the target market.

Couldn’t some of these stumbling blocks be cleared out of the way by digital means? For example, these days it is much easier to get information about the target market.

Yes, some of the information that could provide implications is available in digital form. But the information you get via your personal contacts is far more important. Even in the digital age, a customer-supplier relationship can be an important source of information about how your business will develop. And if you are planning something new in two or three years’ time, you can discuss with your customer whether or not they are willing to join you on this journey. These are just a few examples of the considerable importance of soft factors for internationalization – I always say “the soft side is the hardest”. The importance of the relationship level in foreign markets cannot be digitized out of the picture. Of course, if you know your partner well, you can also hold a meeting via Skype now and again. But that is no substitute for the personal contact, for time spent traveling in the relevant market or for sharing an evening meal.

So will I still need a distribution partner in future, even though I just want to establish an e-commerce branch in China, for example?

Apart from the fact that there are certain legal requirements in China and many other countries, for example, to have a local joint venture partner to operate in the market, I wouldn’t have much faith in you if you were to try set up an e-commerce platform without a partner on the spot. As a foreign company, you face certain disadvantages: It is more than likely that you have an insufficient grasp of the language, you do not understand certain things, make mistakes – in both traditional business and e-commerce. Often you need a local partner who says to you: “Why not do it like this next time”. And you also need the local networks to meet customers and manage the relationships with the local authorities. The further away you are and the less predictable the political landscape is in a country, the more important it is to have a local presence.

Which internationalization processes would be more strongly affected by digitization?

This depends very much on the industry, technology and network. Take 3D printing, for example. In many areas, this will not have any effect. Especially where natural products such as wood or leather are processed. However, Industry 4.0 could lead to certain processes that were previously outsourced returning to Europe in some cases: Factories are becoming increasingly efficient and processes are being automated. In some sectors, the wage factor will play a less important role in future. If, for example, clothing is customized for each individual customer and produced fully automatically, you can also save on the high transport costs from Asia, communication is easier and delivery times are shorter. Many larger companies now initially rely on near-shoring, i.e. on production in Eastern Europe, compared to the previous off-shoring to Asia. Re-shoring to Central Europe could occur in the long term. A great opportunity for suppliers! However, many of these technologies have not yet crystallized out, making it difficult to predict which industry will be affected.

The bottom line: Does digitization offer more opportunities in international business?

Digital technologies definitely offer more opportunities! However not just for you, but also for your competitors. Everyone has access to more information, to new distribution channels. This is sometimes underestimated. The combination of digitization and globalization will lead to exposure to more foreign competitors. In future, Swiss SMEs and large companies will have to specialize even more than they already do today. Focus on what you do best. The more you have to deal with competitors, the more you need to hone your business model, be unique, perhaps even provide additional services to justify the higher price again and again. This is still rather difficult, because it will mean that some SMEs will have to wind down some areas, even though they were successful in the past. For the location as a whole, it is essential that many companies specialize internationally, since this is the only way to make the economy as a whole more competitive.

This poses huge challenges for exporting SMEs that have already been struggling with their strong currency for years.

Certainly, but this is nothing new. Throughout the entire history of the economy, all companies facing competition from abroad have always been compelled to develop innovations and to use new technologies. The oldest sources that report of multinationals are 4,000 years old and date back to the Assyrian empire. Just imagine you had to run an international company back then! At the time, company managers also relied on innovation. They developed the first basic accounting systems and adapted the art of writing for their purposes. Even now, we must not perceive today's technologies and the challenges they entail merely as a threat. They represent a clear opportunity for the highly specialized Swiss SMEs to hold their own better against international competitors.

Winfried Ruigrok is Professor of Management with special focus on international management at the University of St. Gallen.

The four basic questions of internationalization

Despite all the differences and coincidences, Professor Winfried Ruigrok sees four basic questions for companies who want to enter or expand into international business.

  • Why should we internationalize? What will this enable us to achieve? Could we even improve ourselves and offer more by growing? The realization that it could be worthwhile to go international is a mental process that can take a while.
  • When is the right time to internationalize or to venture into a new market? Contrary to what is commonly assumed, you do not necessarily have to be a first mover – as a second or third mover you can perhaps learn from the experiences of the others.
  • Where , i.e. in which market should we become internationally active? Experience has shown that the vast majority of companies progress gradually from local to distant markets.
  • How should we tackle internationalization? Establishing networks abroad is especially crucial. This is where organizations such as S-GE play an important role.

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