The Globalization of the Small Enterprise
| Category: Business Development | Date: 2003-03-10 |
The globalization of the small enterprise will most likely be the most important development in international business as we begin the new millennium. Clearly, the 20th century has witnessed the transformation of global commerce by transnational conglomerates and/or multinational corporations. This transformation is most evident when one considers the impact of the worldwide disaggregation of production and the advent of transfer prices, which tend to distort the real prices of manufactured components transferred across national boundaries but within a multinational corporation. It is certainly the case that large global corporations have created a significant portion of this centurys wealth, however, it is the smaller enterprise that has been the engine that has generated most of the worlds economic growth over the past 20 years.
The challenge faced by many small enterprises will be how to globalize their operations in order to be able to better source raw materials and components and to take advantage of proximity to global markets in order to compete head to head with much larger companies. In order to do this, smaller companies will be forced to make a choice between two options:
#1 to hire an international business specialist and
#2 to retain an international business consulting company.
These choices are not mutually exclusive because it is entirely possible that some companies might choose to do both things. In any case, companies will be forced by rapid changes in the global economy to realign themselves accordingly.
Globalization is a very recent phenomenon for most small and medium sized companies. That is, buying and selling in global markets, up until very recently, was generally speaking an undertaking specifically achieved by the use of an intermediary. In most cases, the intermediary was a global trading company. Global trading companies worldwide shared certain characteristics regardless of national origin. Most were fairly large business organizations with the significant financial resources necessary for international transactions. Contrary to popular myth, much of the business done between a global trading company and a foreign distributor, its overseas counterpart, was conducted on open account. Open account means that the distributor was creditworthy enough to be capable of receiving goods on credit by means of acceptance of a documentary draft. Essentially, a documentary draft is a document that compels the foreign distributor to accept responsibility to pay for a shipment as long as the documents, namely the bill of lading and other shipping and Customs documents are in order. Still today, the more familiar trade document, the letter of credit, is very often backed up by a documentary draft or bill of exchange. What is most important to note in this context, however, is the fact that until the late 1980s most global trading companies preferred to do business with foreign distributors who were good credit risks and who had both banking and trade references.
In many instances, specialized global trading companies, also known as export management companies, acted as the familiar "middleman". Unfortunately, increased foreign travel and contacts with more foreigners gave very many people the impression that the so-called middleman role was quite easy to perform. It is quite often difficult to dispel such myths. Nonetheless, being an intermediary is a very complex task that requires significant understanding of differences in business culture and the ways in which an international transaction is concluded. For most manufacturers in the United States, and in other places as well, handing off the task of exporting was a welcome relief. Global trading companies were a group unto themselves, very often shrouded in a veil of secrecy. Most business executives did not want to know the details of how their products got sold overseas just as long as they got sold. As export markets began to grow in earnest in the mid to late 1970s into the early 1980s, global trading companies grew in power. Those business executives who did understand what these intermediaries were doing were quite often deterred from undertaking the role themselves because of its complexity. First there was the issue of finding a good foreign distributor. People who have worked at a global trading company will all tell you the same thing: anybody can find a foreign distributor. The trick is to find a good foreign distributor. Then came the issue of negotiating a good deal for the manufacturer while making sure that the intermediary was properly compensated. Sometimes, it was important to have good banking facilities because both parties wanted to guard against any currency fluctuation swings that might erase profit margins. This, of course, was just the beginning.
For all practical purposes, two significant events changed the nature of global business for small and medium sized companies, especially in North America. It is very important to make this clear distinction from multinational corporations or global conglomerates. The first change was the advent of the facsimile machine. Before the fax machine became prominently used for direct and immediate written communications, most global trading companies relied upon the telex machine for direct and reliable communication. Telex machines were relatively expensive and required trained operators. Thus, any global trading company that was serious about providing services for its clients needed to have trained teletype operators to run the telex machines. These trained operators could wield significant power within a relatively small company that depended upon them for daily communications. The second change was in the educational systems. During the 1980s, local community colleges and many major universities began offering international business specialty courses. Many of the earlier curricula focused primarily on transportation and logistics functions, the types of activities normally performed by a foreign freight forwarder. However, as more people became interested in international business skills, the courses available to the public increased in variety and scope.
These two changes had a swift and far-reaching effect on the business practices of global trade intermediaries. Most notably, the fax machine eliminated the need for teletype operators and this eliminated the jobs of many people who had become very secure in their positions. The easy availability of training for jobs as freight forwarders, Customs House Brokers, documents examiners and letter of credit specialists meant that a large pool of skilled employees became available for hire by manufacturers. Suddenly, global trading companies who had dominated import-export trade for most of this century found themselves locked into competition with their clients (manufacturers and service providers) for the most highly skilled employees available. Many manufacturers discovered that they could hire in-house international business specialists who could perform most of the actual marketing functions of the intermediary and for significantly less money. As global competition heated up, thinner profit margins meant that any cost savings could mean the difference between making a profit and facing extinction. This basic change in international business practices really intensified in 1987 when the fax machine finally eliminated the use of the telex. What should also be mentioned here is the fact that most of the training of skilled international business specialists had been heretofore limited to the community of global trading companies. Many have referred to this method as the "back room" training method because of the insular nature of global trading companies. That is, one could only learn that which the person offering the training was willing to give. The major flaw in this on-the-job type training was the fact that those doing the training had a vested interest in doing a bad job in order to protect their own position within the company.
The advent of the Internet, especially the use of electronic mail for communications and the increasing popularity of the World Wide Web as a medium for communications, public relations and sales promotion, has hastened the pace of changes now occurring in international commercial practices. E-mail is threatening to eliminate the fax machine as quickly as the fax machine eliminated the telex. The World Wide Web makes it possible for anybody with Internet access to set up a website and offer goods and/or services to the entire world for about U.S. $50 per month.
Compare these costs for entry to those of a global trading company that employed specially trained people such as a telex machine operator, freight forwarder/Customs House Broker or transportation/logistics coordinator, import-export clerk, documents examiner and import-export marketing people. The elimination of this significant barrier to entry has fostered an environment in which anybody can claim to be an import-export trading company and has given rise to a proliferation of smaller global trading companies offering specialized services. This, in turn, has created a climate of confusion about professional credentials and has also encouraged the proliferation of volumes of useless trade leads (I covered this trade lead topic in some detail in an article titled, "Evaluating Trade Leads", which I wrote in late 1997. This article was summarized in the July 1998 issue of Gateway.) and/or other false or otherwise misleading information in the marketplace.
To make matters worse, you also have the active participation of the international banking community. In this context, one has to remember that the "old" way of doing business, in which the global trading company and the foreign distributor were mutual business partners, effectively limited a banks ability to earn fees from transactions. The bank was limited to verifying and/or vouching for the credit risk assessment of the foreign distributor and earning fees for discounting commercial paper such as an accepted documentary draft. A bank might also occasionally finance an initial stocking order so that the overseas distributor might have inventory on-hand of the manufacturers products in order to sell to its clients. Once the reliability of the distributor is established, the banks participation is very limited. This is a very important point because most people just assume that the letter of credit is the principal way of arranging international transactions. While the letter of credit has been in use in one form or another for several hundred years, it was not the primary document used in international business transactions between a trade intermediary in North America and a foreign distributor until very recently. The changes within global trading companies in North America meant that some institution had to step forward to assume the role previously played by trade intermediaries. Therefore, it was the banks in North America who actually promoted the increased use of the letter of credit as the primary financial instrument of international trade. There was no altruism involved here at all. The banks were hardly interested in making life easier for small and medium sized companies, as some would suggest. No, their motivation upon the disappearance of large trading companies and the appearance of smaller and more specialized intermediaries was merely profit. Not only did banks in North America earn nice profits, but their counterparts overseas made more money as well.
What does all of this mean? For most small and medium sized companies, the aforementioned changes simply mean that their business environment has become more complex. In too many companies, however, it is almost impossible to assess the impact of these changes because too many business executives are still in denial about these changes and have not rethought their business strategy accordingly. It would be very easy to say that this type of in-the-box thinking is to be expected given the circumstances of most small and medium sized companies. In fact, it is probably the case that this is equally true of small and medium sized companies everywhere in the world. To those of us who work with SMEs, there is an understanding that these companies almost always focus on their distinctive competency. That is, they tend to really be very good at producing their good or service or developing their new technology and they tend to not be so good at actually selling this good, service or technology to the global marketplace. The most compelling reason for this would be a tendency to think that their product, technology or service will sell itself because it is so good. While this is quite understandable, it is nevertheless an impediment to success in the global marketplace.
As we move forward into the next millennium, the real challenge for many smaller enterprises will be navigating the complexities of an increasingly globalized marketplace. This will simply mean that companies will have to globalize the operations in one way or another. Some will hire an international business specialist to develop a global strategy. Others will rely upon an international business consultant like myself. Some will hire an in-house specialist as well as retaining an outside consulting company. Almost all companies will be required to develop many different types of business relationships that offer their company a very well defined presence in foreign markets. Companies will also have to find new and more effective ways of assimilating huge amounts of information and analysing it as well. Employees will be required to adapt and learn new skills such as foreign languages and international commercial practices. Top business executives will be required to travel to foreign markets more frequently to visit foreign distributors and to participate in trade missions and trade shows. Industry trade organizations are going to become even more powerful because their membership will represent key business constituencies that will wield significant power. In the very near future, global strategic planning will become an essential factor for the success of the enterprise.
Looking ahead, it is very clear that business executives will have to rethink their global business strategy and to find a more dynamic approach to keep pace with changes in the global marketplace. What is not so clear, however, is how this approach will be developed. It is certain that any new solutions will be technology-based. It is this factor alone that complicates the true nature of the existing challenge for small and medium sized companies. An entirely new profession, international business specialist, has been born within the past 20 years or so and this new highly skilled profession is threatening to upset the delicate balance that exists within the management structure of most small and medium sized companies. When added to the fact that most small and medium sized companies now require a Chief Technology Officer, you now have two powerful business specialists whose input is crucial to the success of the smaller enterprise. Whether or not companies rely upon outside service providers or hire their own staff in-house, the expertise provided by the Chief Technology Officer and the international business specialist will become an essential part of the make-up of any successful company. Given the resistance to change that is an outstanding characteristic of smaller enterprises worldwide, it will be very interesting to see how these new business skills will be incorporated into companies business culture. When one considers the maverick nature of the people drawn to becoming international business specialists or technology officers, it is quite clear that the early part of the 21st century will be very interesting. In most small and medium sized companies there will be a clash of basic business principles between those who favour a more traditional management approach and those who are preparing for the next generation of global business. How this will play out is anybodys guess, but it should be very interesting to watch it unfold in a global environment that changes daily.
Copyright © 1997-2000 Trade Compass. All Rights Reserved.
About the Author
Jeffrey P. Graham is President of JPG Consulting. For more information, please contact Mr. Graham at jpgconsulting@earthlink.net, or visit JPG Home Page at venture-web.or.jp/JPG.html
jpgconsulting@earthlink.net
http://www.venture-web.or.jp/JPG.html
The challenge faced by many small enterprises will be how to globalize their operations in order to be able to better source raw materials and components and to take advantage of proximity to global markets in order to compete head to head with much larger companies. In order to do this, smaller companies will be forced to make a choice between two options:
#1 to hire an international business specialist and
#2 to retain an international business consulting company.
These choices are not mutually exclusive because it is entirely possible that some companies might choose to do both things. In any case, companies will be forced by rapid changes in the global economy to realign themselves accordingly.
Globalization is a very recent phenomenon for most small and medium sized companies. That is, buying and selling in global markets, up until very recently, was generally speaking an undertaking specifically achieved by the use of an intermediary. In most cases, the intermediary was a global trading company. Global trading companies worldwide shared certain characteristics regardless of national origin. Most were fairly large business organizations with the significant financial resources necessary for international transactions. Contrary to popular myth, much of the business done between a global trading company and a foreign distributor, its overseas counterpart, was conducted on open account. Open account means that the distributor was creditworthy enough to be capable of receiving goods on credit by means of acceptance of a documentary draft. Essentially, a documentary draft is a document that compels the foreign distributor to accept responsibility to pay for a shipment as long as the documents, namely the bill of lading and other shipping and Customs documents are in order. Still today, the more familiar trade document, the letter of credit, is very often backed up by a documentary draft or bill of exchange. What is most important to note in this context, however, is the fact that until the late 1980s most global trading companies preferred to do business with foreign distributors who were good credit risks and who had both banking and trade references.
In many instances, specialized global trading companies, also known as export management companies, acted as the familiar "middleman". Unfortunately, increased foreign travel and contacts with more foreigners gave very many people the impression that the so-called middleman role was quite easy to perform. It is quite often difficult to dispel such myths. Nonetheless, being an intermediary is a very complex task that requires significant understanding of differences in business culture and the ways in which an international transaction is concluded. For most manufacturers in the United States, and in other places as well, handing off the task of exporting was a welcome relief. Global trading companies were a group unto themselves, very often shrouded in a veil of secrecy. Most business executives did not want to know the details of how their products got sold overseas just as long as they got sold. As export markets began to grow in earnest in the mid to late 1970s into the early 1980s, global trading companies grew in power. Those business executives who did understand what these intermediaries were doing were quite often deterred from undertaking the role themselves because of its complexity. First there was the issue of finding a good foreign distributor. People who have worked at a global trading company will all tell you the same thing: anybody can find a foreign distributor. The trick is to find a good foreign distributor. Then came the issue of negotiating a good deal for the manufacturer while making sure that the intermediary was properly compensated. Sometimes, it was important to have good banking facilities because both parties wanted to guard against any currency fluctuation swings that might erase profit margins. This, of course, was just the beginning.
For all practical purposes, two significant events changed the nature of global business for small and medium sized companies, especially in North America. It is very important to make this clear distinction from multinational corporations or global conglomerates. The first change was the advent of the facsimile machine. Before the fax machine became prominently used for direct and immediate written communications, most global trading companies relied upon the telex machine for direct and reliable communication. Telex machines were relatively expensive and required trained operators. Thus, any global trading company that was serious about providing services for its clients needed to have trained teletype operators to run the telex machines. These trained operators could wield significant power within a relatively small company that depended upon them for daily communications. The second change was in the educational systems. During the 1980s, local community colleges and many major universities began offering international business specialty courses. Many of the earlier curricula focused primarily on transportation and logistics functions, the types of activities normally performed by a foreign freight forwarder. However, as more people became interested in international business skills, the courses available to the public increased in variety and scope.
These two changes had a swift and far-reaching effect on the business practices of global trade intermediaries. Most notably, the fax machine eliminated the need for teletype operators and this eliminated the jobs of many people who had become very secure in their positions. The easy availability of training for jobs as freight forwarders, Customs House Brokers, documents examiners and letter of credit specialists meant that a large pool of skilled employees became available for hire by manufacturers. Suddenly, global trading companies who had dominated import-export trade for most of this century found themselves locked into competition with their clients (manufacturers and service providers) for the most highly skilled employees available. Many manufacturers discovered that they could hire in-house international business specialists who could perform most of the actual marketing functions of the intermediary and for significantly less money. As global competition heated up, thinner profit margins meant that any cost savings could mean the difference between making a profit and facing extinction. This basic change in international business practices really intensified in 1987 when the fax machine finally eliminated the use of the telex. What should also be mentioned here is the fact that most of the training of skilled international business specialists had been heretofore limited to the community of global trading companies. Many have referred to this method as the "back room" training method because of the insular nature of global trading companies. That is, one could only learn that which the person offering the training was willing to give. The major flaw in this on-the-job type training was the fact that those doing the training had a vested interest in doing a bad job in order to protect their own position within the company.
The advent of the Internet, especially the use of electronic mail for communications and the increasing popularity of the World Wide Web as a medium for communications, public relations and sales promotion, has hastened the pace of changes now occurring in international commercial practices. E-mail is threatening to eliminate the fax machine as quickly as the fax machine eliminated the telex. The World Wide Web makes it possible for anybody with Internet access to set up a website and offer goods and/or services to the entire world for about U.S. $50 per month.
Compare these costs for entry to those of a global trading company that employed specially trained people such as a telex machine operator, freight forwarder/Customs House Broker or transportation/logistics coordinator, import-export clerk, documents examiner and import-export marketing people. The elimination of this significant barrier to entry has fostered an environment in which anybody can claim to be an import-export trading company and has given rise to a proliferation of smaller global trading companies offering specialized services. This, in turn, has created a climate of confusion about professional credentials and has also encouraged the proliferation of volumes of useless trade leads (I covered this trade lead topic in some detail in an article titled, "Evaluating Trade Leads", which I wrote in late 1997. This article was summarized in the July 1998 issue of Gateway.) and/or other false or otherwise misleading information in the marketplace.
To make matters worse, you also have the active participation of the international banking community. In this context, one has to remember that the "old" way of doing business, in which the global trading company and the foreign distributor were mutual business partners, effectively limited a banks ability to earn fees from transactions. The bank was limited to verifying and/or vouching for the credit risk assessment of the foreign distributor and earning fees for discounting commercial paper such as an accepted documentary draft. A bank might also occasionally finance an initial stocking order so that the overseas distributor might have inventory on-hand of the manufacturers products in order to sell to its clients. Once the reliability of the distributor is established, the banks participation is very limited. This is a very important point because most people just assume that the letter of credit is the principal way of arranging international transactions. While the letter of credit has been in use in one form or another for several hundred years, it was not the primary document used in international business transactions between a trade intermediary in North America and a foreign distributor until very recently. The changes within global trading companies in North America meant that some institution had to step forward to assume the role previously played by trade intermediaries. Therefore, it was the banks in North America who actually promoted the increased use of the letter of credit as the primary financial instrument of international trade. There was no altruism involved here at all. The banks were hardly interested in making life easier for small and medium sized companies, as some would suggest. No, their motivation upon the disappearance of large trading companies and the appearance of smaller and more specialized intermediaries was merely profit. Not only did banks in North America earn nice profits, but their counterparts overseas made more money as well.
What does all of this mean? For most small and medium sized companies, the aforementioned changes simply mean that their business environment has become more complex. In too many companies, however, it is almost impossible to assess the impact of these changes because too many business executives are still in denial about these changes and have not rethought their business strategy accordingly. It would be very easy to say that this type of in-the-box thinking is to be expected given the circumstances of most small and medium sized companies. In fact, it is probably the case that this is equally true of small and medium sized companies everywhere in the world. To those of us who work with SMEs, there is an understanding that these companies almost always focus on their distinctive competency. That is, they tend to really be very good at producing their good or service or developing their new technology and they tend to not be so good at actually selling this good, service or technology to the global marketplace. The most compelling reason for this would be a tendency to think that their product, technology or service will sell itself because it is so good. While this is quite understandable, it is nevertheless an impediment to success in the global marketplace.
As we move forward into the next millennium, the real challenge for many smaller enterprises will be navigating the complexities of an increasingly globalized marketplace. This will simply mean that companies will have to globalize the operations in one way or another. Some will hire an international business specialist to develop a global strategy. Others will rely upon an international business consultant like myself. Some will hire an in-house specialist as well as retaining an outside consulting company. Almost all companies will be required to develop many different types of business relationships that offer their company a very well defined presence in foreign markets. Companies will also have to find new and more effective ways of assimilating huge amounts of information and analysing it as well. Employees will be required to adapt and learn new skills such as foreign languages and international commercial practices. Top business executives will be required to travel to foreign markets more frequently to visit foreign distributors and to participate in trade missions and trade shows. Industry trade organizations are going to become even more powerful because their membership will represent key business constituencies that will wield significant power. In the very near future, global strategic planning will become an essential factor for the success of the enterprise.
Looking ahead, it is very clear that business executives will have to rethink their global business strategy and to find a more dynamic approach to keep pace with changes in the global marketplace. What is not so clear, however, is how this approach will be developed. It is certain that any new solutions will be technology-based. It is this factor alone that complicates the true nature of the existing challenge for small and medium sized companies. An entirely new profession, international business specialist, has been born within the past 20 years or so and this new highly skilled profession is threatening to upset the delicate balance that exists within the management structure of most small and medium sized companies. When added to the fact that most small and medium sized companies now require a Chief Technology Officer, you now have two powerful business specialists whose input is crucial to the success of the smaller enterprise. Whether or not companies rely upon outside service providers or hire their own staff in-house, the expertise provided by the Chief Technology Officer and the international business specialist will become an essential part of the make-up of any successful company. Given the resistance to change that is an outstanding characteristic of smaller enterprises worldwide, it will be very interesting to see how these new business skills will be incorporated into companies business culture. When one considers the maverick nature of the people drawn to becoming international business specialists or technology officers, it is quite clear that the early part of the 21st century will be very interesting. In most small and medium sized companies there will be a clash of basic business principles between those who favour a more traditional management approach and those who are preparing for the next generation of global business. How this will play out is anybodys guess, but it should be very interesting to watch it unfold in a global environment that changes daily.
Copyright © 1997-2000 Trade Compass. All Rights Reserved.
About the Author
Jeffrey P. Graham is President of JPG Consulting. For more information, please contact Mr. Graham at jpgconsulting@earthlink.net, or visit JPG Home Page at venture-web.or.jp/JPG.html
jpgconsulting@earthlink.net
http://www.venture-web.or.jp/JPG.html
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