Family Business Essay

Bachelor Thesis Organization & Strategy Entrepreneurship The Internationalization of Family Businesses By Bart van Overbeek 910523 University of Tilburg BSc International Business Adminstration (former Business Studies) April 2010 Bart van Overbeek Preface This thesis presents the results from research conducted during February to June 2010. In February 2010, I, Bart van Overbeek, started conducting research on the topic of expanding to international markets by family-owned businesses. This study was conducted for the Department Organization and Strategy of the University of Tilburg.

During the research period, some interesting and some unfavorable outputs came to the light, that will be presented throughout this thesis. At first, I would like to express my sincere gratitude towards my supervisor Stijn van den Hoogen. Without his advise and feedback, this thesis would not have come to clarity and completion. Furthermore, I would like to thank my fellow thesis writers for their efforts in giving feedback and for their quality of feedback. Also, I would like to thank my father, Roel van Overbeek, for giving me the idea to write this thesis about.

We will write a custom essay sample on
Family Business
specifically for you for only $13.9/page
Order now

Thanks to him, I was able to formulate my propositions into a clear topic and concept. Tilburg, June 2010 Bart van Overbeek 1 Bart van Overbeek Management summary This bachelor thesis focused on internationally expanding by family firms. Family-owned businesses are unique of nature and in this thesis these kinds of businesses have been defined as firms that are managed and controlled by at least two members of the family, seeking sustainability of the firm and where family members seek increasing involvement within the firm.

Family firms, in their business operations, cope with the family segment, which, due to emotionality and complexity of firm and family issues, negatively affects the operations. However, family businesses outperform their counterparts in terms of sales and profits. This can be explained by their unique “family language” and their overall high levels of trust. When family firms want to expand to international markets, they have to take into account that there are numerous factors affecting this process. Family firms tend to be more conservative towards international expansion and they can even be viewed as risk-adverse in such cases.

They focus too strong on their domestic markets which limits the internationalization. Surely the government aids in the internationalization, but family firms strengthen this process themselves by listening to the market demand. Successful successions in family-owned businesses mostly aid in the process of internationalization by providing ambitious ideas and strategies. Internationalization is one of the most difficult strategies a company can undertake. In order for a company to consider international expansion, the costs, such as exchange-rate fluctuations, should be outweighed by the benefits, such as knowledge increase.

Family firms should follow a certain pattern before internationalizing. They have to draw up a plan that involves all aspects of the operations, the target markets, the time pattern and the sales objects. Family firms and its managers ought to know that the greater the distance between their domestic markets and a foreign target market is, the smaller the level of knowledge is. When entering foreign markets, three main entry strategies can be used, namely export entry, contractual entry and investment entry. Export entry can be either with the use of intermediary agents (indirect) or the company goes directly to the customer (direct).

While export entry is the most used entry strategy, for every company another “ideal” strategy is needed, because this strategy will affect the business operations for a future period of time. 2 Bart van Overbeek Table of Contents 1 Introduction …………………………………………………………………………………………………………………………. 4 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 2 Problem Indication ……………………………………………………………………………………………… Problem Statement ………………………………………………………………………………………………. 5 Research Questions……………………………………………………………………………………………… 5 Research Method ………………………………………………………………………………………………… 5 Relevance…………………………………………………………………………………………………………… Thesis Structure ………………………………………………………………………………………………….. 6 The definition …………………………………………………………………………………………………….. 7 The interactions of family businesses …………………………………………………………………….. 8 The character ……………………………………………………………………………………………………… Summary ………………………………………………………………………………………………………….. 11 Restraining factors …………………………………………………………………………………………….. 12 Facilitating factors …………………………………………………………………………………………….. 13 Summary ………………………………………………………………………………………………………….. 4 Cost and Benefits of Internationalization ……………………………………………………………… 16 Costs …………………………………………………………………………………………………………………… 16 Benefits……………………………………………………………………………………………………………….. 17 The „where? of internationalization: the target markets ……………………………………………… 19 The „how? of internationalization: the operation mode. ……………………………………………… 0 Family Business Characteristics ……………………………………………………………………………………………… 7 2. 1 2. 2 2. 3 2. 4 3 Factors affecting the Internationalization process ……………………………………………………………………. 12 3. 1 3. 2 3. 3 4 Internationalization strategy plan ………………………………………………………………………………………….. 16 4. 1 4. 1. 1 4. 1. 2 4. 2 Patterns of Internationalization ……………………………………………………………………………. 7 4. 2. 1 4. 2. 2 4. 3 5 Summary ………………………………………………………………………………………………………….. 21 Conclusions ……………………………………………………………………………………………………… 22 Recommendations and Discussion ………………………………………………………………………. 24 Conclusions and recommendations ……………………………………………………………………………………….. 22 5. 1 5. 2

References ………………………………………………………………………………………………………………………………… 26 3 Bart van Overbeek 1 Introduction 1. 1 Problem Indication In today? s world, family firms play a major role in the leading economic growth throughout the globe. With world markets rapidly merging, many firms and organizations become more and more globally oriented (Zahra, 2003). Family businesses internationalize for many reasons, such as profitability, market domination, brand awareness, etcetera (Zahra, 2003).

Gallo and Sveen (1991) examined that family businesses are faced with many factors that can either encourage and facilitate operating on international markets, but also many factors that could restrain the internationalizing of the family firm. The strategy, the structure, the culture and the development stage of the company are all connected to the family firms characteristics, and each of these areas have different factors that facilitate or restrain the internationalization of the family firm (Fernandez & Nieto, 1999).

If the company is unable to overcome the restraining factors, the process of internationalization by the family firm will not succeed (Taylor, 2006). Internationalization is the most complex and difficult strategy that any firm can undertake (Su & Poisson, 2000). But this strategy is likely to become more necessary, because of stagnation of home markets or faster growing foreign markets (Root, 1994). Even for family businesses that traditionally focused on their domestic markets it is becoming necessary to expand abroad.

In general, family businesses are less eager to grow, and even less in international markets (Fernandez & Nieto, 1999). The question remains to what extent the aspect of family within business affects the decision of expanding internationally. Therefore if internationalizing of family firms differs from non family businesses (Cerrato & Piva, 2007) . As said, if the company does not overcome the restraining factors, but also does not take advantage of the factors that facilitate the internationalization, there will be no chance of the family business going further than its domestic markets. Bart van Overbeek 1. 2 Problem Statement The problem statement can be defined as: How can family firms expand their businesses internationally? 1. 3 Research Questions § What are the characteristics of a family business? § What are the facilitating and restraining factors for the internationalization process? § What kind of strategy plan is needed for internationalizing? 1. 4 Research Method The design of this thesis will be of descriptive nature. A large part of this thesis will be a literature review. Descriptive research will be done to tackle the problem at hand.

This bachelor thesis will rely on the research of secondary sources. These secondary sources are articles obtained from several renowned academic journals and magazines. These articles are gathered by searching through available online databases which include ScienceDirect. com and IngentaConnect. com. The databases have been accessed both directly as well as through the Tilburg university search engine. Keywords for searching include family businesses, internationalization, family business characteristics and internationalization factors.

The main concepts that will be investigated are, also as stated in the problem statement and research questions: ? Characteristics of family businesses ? Facilitating factors for internationalization ? Restraining factors for internationalization ? Internationalization strategy ? International expanding 5 Bart van Overbeek 1. 5 Relevance This bachelor thesis? relevance would best be specified to be academic. From an academic perspective, the purpose of this thesis is aggregate existing knowledge about the features of internationalization that will assist family firms in expanding to foreign markets.

This thesis aims to provide a clear and comprehensive overview about the topic at hand. This will be done by providing a literature review about numerous characteristics of family businesses and factors influencing the internationalization process. This thesis will be providing an understandable report in the field of family firms and their internationalization. 1. 6 Thesis Structure Included in this section is an overview of the chapters discussed in this thesis. In the course of this bachelor thesis, an answer will be given to the problem statement; How can family firms expand their businesses internationally?

In order to do this, a series of sub-questions are drawn up to clarify the steps of research. In Chapter two, this thesis will explain what the characteristics of a family business are. Also, in what way do family firms differ from non-family firms in their business operating. Describing the characteristics is the first step in understanding the internationalisation process of family firms. This leads to the second and third step in the research. In the third chapter, factors affecting the internationalization process will be described.

This chapter is about what the facilitating, but also the restraining factors are of operating abroad ones domestic market. These factors try to make clear in what way expanding internationally is influenced for family firms. In the following section, chapter four, this thesis will clarify strategies for the internationalizing process of family firms. In the final chapter, conclusions to the question “How can family firms expand their businesses internationally? ” are drawn up. This chapter gives the final answer to the problem at hand. 6 Bart van Overbeek 2 Family Business Characteristics

When taking into account the term “family business”, one cannot help wondering what the actual definition of this term is. The definition of “family business” or “family firm”, “family company”, “family ownership”, etc. is not as easy as it may seem. During this thesis, these terms will be used interchangeably to refer to family businesses. Research and theory have shed a light on how family businesses may differ from non-family firms and thus raising the question what factors make them more or less successful in surviving and growing than non-family firms (Chrisman et al, 2003). . 1 The definition Although size of a firm does not matter for the kind of company, family firms come in many different forms, such as sole proprietorship, partnership, limited liability companies, holding companies, and many more. Defining the term family business can be done in its most uncomplicated way by saying it is a business owned and managed by more than one member of a family (Hollander & Elman, 1988; Astrachan & Astrachan, 1993). The dominant theoretical definition according to Proza (2004, p. ), states that a family firm is “controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families and continuity of the family business”. In many cases, sustainability is not the only goal to be pursued. Family members within family firms try to seek increased involvement within the company during the years of employment. Within this theory, the definition, as given by Litz (1997) would be of more use.

He argues that a family business is a business which is characterized by ownership and management concentrated in a family unit, and in which the individuals within the firm are intended to maintain or increase the degree of intra-organizational family involvement. To conclude the definition on what a family business is, this thesis will be using the definition of a family firm that it is a business controlled and managed by more than one member of a family, trying to sustain the company across generations of the family and where the individuals of the company and therefore of the family- seek to increase the degree of involvement throughout 7 Bart van Overbeek their professional careers. This definition takes many dimensions of family business into account and therefore clarifies the broadness of a family firm. 2. 2 The interactions of family businesses Often people do not realize the unique nature of family businesses in the business world. Any business must conduct efficient management to survive in the business world. But family firms have many other factors they also have to deal with to sustain their businesses.

According to Taylor (April 2006), family firms cope with many different factors with respect to relatives. Namely for instance that relatives provide capital for the company, and that ownership and management are transferred between generations over time. It is important to understand that family firms, unlike non-family firms, have many interactions within their existence and operations. The interaction between on the one hand family dynamics and on the other business operations is very important (Smith, 2006).

To clarify, there are three segments of a family business; the family, the business and the ownership. Within a non-family business, this family-aspect does not exist, simplifying the style of commerce. Since family businesses do have this segment, this causes for more interactions within the concept of existence. Written for the University of Wyoming Corporate Extension Service (UWCES), Taylor (2006) acknowledged that family businesses cope with multiple factors and that these segments and interactions need to be in balance for a family company to function properly and to survive.

This means that, for a family firm, if one segment, for example the „family? segment, becomes larger at the expense of another segment, the balance will be distorted. Taylor (2006) explained that the centre 8 Figure 1: The interactions of a family enterprise Source: Tagiuri, R. ; Davis, J. A. (1982), Bivalent Attributes of the Family Firm. Bart van Overbeek diagram means the family enterprise (shown in figure 1 by “sustainable, profitable growth”). So, if one of the circles would enlarge at the cost of another, the diagram of family enterprise would shift and be out of balance.

Therefore having an effect on the survival or sustainability of the company. Within family businesses, the influence of family, also in this example, can be overwhelming (Taylor, 2006). It is very difficult for a family firm to maintain balance between family and the other segments. Within the business world, as portrayed in the figure as the business segment, an important factor for success is profitability, as is shown in figure 1. Generating profits is what employees are evaluated on, and due to that evaluation, their relationships are formal and often exercised on paper.

But the family segment changes these relationships, because in the family, relationships are highly personal. Therefore posing a threat to the balance of the segments (Gallo & Cappuyns, 2004). 2. 3 The character In the previous sections, this thesis described what a family business is, by explaining it with definitions and by giving an explanation about the dynamic interactions a family firm faces. But to answer the question, what the characteristics of a family firm are, we should go one step further. In essence the distinctiveness of a family firm could be described in four simple factors, as stated by Poza (2004): I.

II. III. IV. Presence of the family Owner? s dream of continuity Overlap of family, management and ownership Unique sources of competitive advantage derived from this overlap. Studies suggest that the success of a family firm depends more on the overlap between family and business, than it does on resources or processes in either the family or the business system (Olson et al. , 2002). This overlap of the family and business system can therefore be of great strength to gain competitive advantage over non-family firms. But, this overlap can also ecome a weakness for the family firm, when these systems collide and a decision must be made as “a family, as a business, or as a family business” (Dyer, 2004, p. 7). 9 Bart van Overbeek The main characteristic of family owned companies is that they try to seek harmony within the individual, the family, the business, and the community (Taylor, 2006; Gallo & Cappuyns, 2004). While non-family businesses strongly incorporate efficiency and objectivity, family owned companies incorporate compassion and caring (Taylor, 2006). Family firms perform better than non-family firms in terms of sales, profits and other growth measurements.

In a study by Thomson Financial for Newsweek (as cited in International Finance Corporation [IFC], 2010), this outperforming of their counterparts is due to the strong characteristics, and therefore strengths, these family firms hold. As stated in the Family Business Governance Handbook provided by the International Finance Corporation (IFC,2010), family businesses possess several characteristics that drive them to obtain high performances. Family businesses have many strengths that empower their performance. Such strengths are commitment to family, reliability, pride and knowledge continuity.

These strengths are characteristic to family firms. They are factors for success. Family business have been described as businesses providing a unique working environment that enhances employee care and loyalty (Ward, 1988). Levering and Moskowitz (1993) stated that family owned companies are more effective in labour intensive businesses than non-family companies. It is also cleared out by Habbershon and Williams (1999) that family firms communicate more efficiently and exchange more information with greater privacy because these firms possess a certain “family language”. And therefore trust and loyalty are enhanced.

But, success is not always granted. Most often, family firms are too complex because of family factor. There is confusion within the company because of a messy structure and no clear division of workers tasks (Kets de Vries, 1993). Kets de Vries also states that family owned business have more difficulties in attracting professional management and even so that family members are milking the business, because of their incompetence. Next to this, too many emotions affect the business issues or family members play too many different roles within the company (Gallo & Cappuyns, 2004).

Therefore, clarification of the labour division is compulsory to obtain excellence. 10 Bart van Overbeek 2. 4 Summary To summarize this chapter has clarified a comprehensive definition of what a family business is. Family businesses are companies that are controlled by more than one member of a family and seeking for sustainability and growth. Furthermore it was explained that family firms have to cope with different segments, where non-family firms do not. Namely, family firms have the family segment, which can affect the balance needed for optimal business.

Family firms are characterized by seeking harmony between family, ownership and business. This harmony can be of great strength to the family firms performance. In fact, in a study by Thomson Financial for Newsweek, family firms are outperforming their counterparts. This is mainly because family businesses communicate more efficiently (Habbershon and Williams, 1999) due to their “family language”. Although trust and loyalty improve business operations within family firms, complexity of workers tasks and high levels of emotions negatively affect them. 11

Bart van Overbeek 3 Factors affecting the Internationalization process The globalization of the economy has driven all kinds of companies to expand their operations internationally (Zahra & George, 2002). But internationalization is the most complex strategy any company can undertake (Su & Poisson, 2000). Even family firms need to expand internationally, although they have traditionally focused on their domestic markets (Fernandez & Nieto, 2005). In principle, family firms are less inclined to grow, and even less in international markets (Fernandez & Nieto, 2005).

Many difficulties of growing in domestic markets would even be greater when a family company decides to expand to foreign markets (Gallo & Garcia-Pont, 1996). 3. 1 Restraining factors This section shows how family owned companies are limited in their expanding to foreign markets. In his paper about internationalization of family businesses, Okoroafo (1999) stresses that family businesses rarely regularly monitor the global market and therefore do not evaluate the international context when making strategic choices.

Moreover, family firms see international expansion as an uncertain decision because of their lack of information about the internationalization process and foreign markets (Fernandez and Nieto, 2005). This lead to the first, and maybe most important restraining factor. Family firms limit their internationalization propensity with their own focus on their own domestic markets (Gallo & Garcia Pont, 1996). A study conducted by Graves and Thomas (2006) shows that family controlled businesses have less access to managerial resources than their counterparts, the non-family businesses.

And with every level of internationalization this gap increases in size. Fernandez and Nieto (2005) also found that owners of family firms find it harder to recruit qualified salaried professionals. In many family firms it is the case that family members demand a high level of commitment and contribution to the firm from non-relatives (Kets de Vries, 1993). Such demands are acceptable if management gives these non-family members the right credit for their work done. However, as Kets de Vries (1993, p. 316) states “it may be unacceptable if the given incentive system is heavily biased toward non-contributing family members.

In this case, it becomes difficult to attract capable managers. A development that may endanger the company? s future. ” 12 Bart van Overbeek As stated in the previous chapter, family firms seek continuity. Family owned businesses tend to be more conservative towards expanding internationally. Next to that, family firms have the priority to keep the control within the family and therefore try to maintain independence. This objective they hold turns into a lower propensity to opportunities to expand internationally.

It is because of this focus, Fernandez and Nieto (2006) find a negative relationship between family firms and their export intensity. Family owned businesses tend to be more conservative towards expanding internationally and even be risk-adverse, therefore Fernandez and Nieto (2005) stress that family firms restrain their risky investments aimed at accumulating intangibles, as in internationalizing. 3. 2 Facilitating factors In the field of internationalization, the stage theory is introduced. The stage theory tells us that a firm? s international activity increases gradually as it acquires knowledge and experience (Cerrato & Piva, 2007).

It also tells us, that market knowledge is the key factor that influences the time, duration and direction of the international development. According to Leonidou and Katsikeas (1996), experience is the only factor that can reduce the uncertainty of expanding internationally. And therefore is the solution to the obstacles. According to them, internationalization is perceived as an incremental process of learning and gaining experience. When experience is lacking, another important factor can strengthen the internationalization of a firm. This factor is relationships, according to Johanson and Vahlne (2003).

Relationships play an important role when it comes to expanding internationally. These relationships provide access to technological, productive and market resources which in turn provide mutual benefits for both parties (Johanson & Vahlne, 2003; Hitt et al. , 2006). Not only relationships and networks aid in the process of operating beyond the domestic markets. Three main drivers that make international expansion easier were pointed out by Callaway (2004). Besides the network of a company as a facilitating factor, he also pointed out that cost factors and unique global resources would aid in the expansion.

However, he also pointed out that only ventures that were capable of integrating knowledge and learning, were able to identify and take advantage of these unique global resources. 13 Bart van Overbeek In a recent study conducted by Senik (2010) it was pointed out that also a number of domestic forces act as pushing factors for encouraging to internationalize. Senik pointed out that internationalizing was greatly influenced by responding to market conditions and the need for expansion. If firms just listen to what the market has to “say”, and thereby need to expand internationally, they will.

It was also pointed out by Senik that national issues and government play an encouraging role in the internationalizing process. The government encourages, and also facilitates, this expanding by granting companies investment tax allowances and exemptions from statutory income from export sales. Because of this, businesses are more inclined to look beyond their domestic market and start operating in foreign markets. According to Okoroafo (1999), family businesses that do not get involved in international markets in the first or second generation of the company, are unlikely to do so in next generations.

So, it is imperative for a family firm to have noticeable drivers that can facilitate the implementation process. In a study conducted by Fernandez and Nieto (2005), it came out that when succeeding generations of a family firm are in managerial positions, the probability of international expansion would be higher than when these generations are not. They stated that succeeding of the heirs is one of the family firm? s greatest challenges. A successful succession can give a new push to the firm and providing its businesses with ambitious ideas and strategies, and therefore even facilitating the internationalization process.

One of the drivers for expanding internationally, although stated in the previous section that many family firms are less capable of attracting them, is the willingness of managers (Su & Poisson, 2000). According to Su and Poisson, the willingness of managers to enter foreign markets and the level of communication networks are very important drivers in the internationalization process. 3. 3 Summary To conclude this chapter, it is shown that many factors affect the process of internationalization. When expanding beyond your domestic market, restraining and facilitating factors are acknowledged.

It is shown that a strong focus on one? s domestic market and risk-adversity can restrain the internationalization process (Gallo & Garcia Pont, 1996; Fernandez & Nieto ,2006), and that also a lack of managerial resources can negatively affect the process of expanding 14 Bart van Overbeek internationally (Graves & Thomas, 2006). Family firms also have the restraint that it is harder for them to recruit qualified salaried professionals. On the other hand, if the managers are willing enough, internationalization of a family firm would be a fact (Su & Poisson, 2000).

But also very important, for facilitating the process of internationalization, is listening to what the market has to “say” (Senik, 2010). Besides networks and relationship, also unique global resources aid in the expansion to foreign markets. With the use of tax allowances and other facilitating measures, the government also plays a part in helping companies expand beyond national borders (Senik, 2010). But also a very important factor is when heirs in a family firm succeed and therefore improve the probability of expanding abroad. 15 Bart van Overbeek 4 Internationalization strategy plan

As stated before, internationalization is one of the biggest challenges a company faces. Internationalization can be a subject to high costs, risk and failure (Ruigrok & Wagner, 2001). But because of growing market globalization it becomes more and more important for companies to implement this strategy of internationalization (Fernandez & Nieto, 2005). The questions raised about strategic manoeuvres are fundamental for stepping outside the domestic market into the international market (Su & Poisson, 2000). Family firms are, in principle, less inclined to grow beyond their domestic markets.

The most commonly accepted reason for this stagnation in expanding is their limited capital, to fund both the family needs and the business needs (Fernandez & Nieto, 2005). In the context of internationalization, resource scarcity has an impact on the ability to enter foreign markets (Ruzzier & Konecnik, 2006). So, what strategy can there be drawn up for (family) businesses to look beyond their domestic markets and expand to foreign ones. 4. 1 Cost and Benefits of Internationalization The process of internationalizing businesses brings benefits as well as costs.

In order to actually expand internationally, the benefits must outweigh the costs (Knight, 2007). 4. 1. 1 Costs As stated, internationalization is one of the most difficult strategies a company can undertake. The strategy of internationalization stresses the managerial capacity and this managerial capacity will be fatigued with increasing levels of internationalization. Because of organizational and environmental complexity, due to increasing levels of internationalization, eventually this managerial capacity will exhaust (Ruigrok & Wagner, 2001; Siddharthan & Lall ,1982).

Not only managerial capacity will be affected when internationalization increases. According to Ruigrok and Wagner (2001), an increase in international expansion will also result in an exponential increase in governance and transaction costs. Following these transaction costs, stated by Ruigrok 16 Bart van Overbeek and Wagner, are the risks and costs derived from exchange-rate fluctuations and inflations. These are all costs that have be accounted for when strategizing international expansion. 4. 1. 2 Benefits

When expanding internationally, benefits are attached. According to Ruigrok and Wagner (2001), internationally expanding will increase organizational learning and knowledge development, because of global resource and core competencies gaining. This so-called “brain-gain” (Knight, 2007) increases labor mobility and strengthens a company? s position to its competitors. Fayerweather (1978) suggested that the international resource transfer can provide a company with specific competencies that cannot be obtained in the domestic market.

The least important benefit, although it is a benefit, of expanding internationally, is the generation of revenues (Knight, 2007). Though gaining revenue is an important factor in choosing to expand, it is not an important benefit of international expansion. These are benefits of international expansion. For a company to start the process of expanding to foreign markets, the company has to have a welloriented strategy. 4. 2 Patterns of Internationalization When, and if, a company decides to expand its business to a foreign markets, it has to follow some pattern that is consistent over a certain period of time.

This so-called internationalization development strategy of the firm (Ruzzier & Konecnik, 2006), should be based on resources that sustain the development of the company? s international activities. The goal of strategy is the achievement of superior, sustainable organizational performance (Hofer & Schendel, 1978). According to Webster (1992), strategies, and the goals they set, must be pursued in the context of orientation. Orientation reflects the company? s basic culture, which is, the dominant pattern of beliefs and values that management emphasizes on a continuous basis to guide the organization.

Strategy is defined by the pattern of present and planned resource deployments and environmental interactions that indicates how the organization will achieve its objectives (Hofer and Schendel, 1978; Webster, 1992). 17 Bart van Overbeek For most entrepreneurs the most significant international decision and also critical first step they are likely to take in the process, is how they should enter the foreign market(s), because this first step, these commitments will affect every aspect of their business for many years ahead (Doole & Lowe, 1999).

However, according to Ruzzier and Konecnik (2006), there is no ideal market entry strategy and different market entry strategies can be used by different firms entering the same, or even different, markets. The entry of a firm into a new (foreign) market is connected to innovative development or enhancement of strategies and general business activities (Zaltman et al. , 1973). This means that, in the sense of entering a new market, the process of internationalization is itself an innovation within the firm (Cavusgil, 1980). The following picture, created by Ruzzier and Konecnik (2006), shows how the internationalization strategy is composed.

Figure 2: Main dimensions of internationalization and the central role of resources, capabilities and routines in an internationalization strategy. Source: Ruzzier, M. & Konecnik, M. : The internationalization strategies of SMEs As shown, the strategy for international expansion is composed of four patterns, namely the operation pattern, the (target) market pattern, the time pattern and the sales objectives pattern. We will focus on the operation and the market pattern, because the time and sales objectives are different for every organization.

With focusing on only the other two patterns, a clear insight can be given about the strategies. 18 Bart van Overbeek 4. 2. 1 The ‘where’ of internationalization: the target markets Target markets differ greatly from each other and from the market of the home country. Ruzzier and Konecnik (2006) therefore emphasize that these differences essentially affect the determination of a company? s target market strategy, and thereby its internationalization strategy. Foreign markets usually involve various uncontrollable challenges that are not present in the home market.

It is because of this known fact that strategic competence may be especially salient for international success (Knight, 2001). Central in the explanation of target markets is the assumption of incremental internationalization (Johanson & Vahlne, 1977). This means that firms that are expanding to international markets, do this on an evolutionary path. Firms start in geographically and culturally close markets, then successively progressing toward cognitively and physically more distant environments (Cerrato & Piva, 2007; Johanson & Vahlne, 1977; Ruigrok & Wagner, 2001).

According to the stage theory, as discussed in chapter three, market knowledge is the key factor that influences the time and direction of international expansion and development. Next to this, the distance of the target market also has an impact on the level of knowledge. In general it holds the following statement. The greater the distance is between the domestic market and the foreign market, the greater the differences and smaller the level of knowledge is about the target country.

And this knowledge about the market is the most critical resource for a company for international involvement (Ruzzier & Konecnik, 2006). Not only the geographical distance plays a role in determining the target market. Another concept, called the psychic distance plays an important role in strategizing ones operations to a foreign market (O? Grady & Lane, 1996). What this concept holds is that companies tend to begin their internationalization process in countries that are ‘psychically’ close. O?

Grady and Lane suggest that psychically close countries are more easily understood than distant ones, and that they offer more familiar operating environments. In the process of expanding, this means that firms limit the targeting to immediate neighbours because knowledge about those markets is easier to obtain than knowledge about geographically more distant markets (O? Grady & Lane, 1996; Ruzzier & Konecnik, 2006). Financial risk is perceived to be minor for companies when dealing with foreign settings closely resembling to home markets.

This expanding to foreign markets closely to home markets also has another reason, namely that 19 Bart van Overbeek organizational structures and corporate control mechanisms only need to be adjusted slightly, because these foreign markets resemble to home markets (Ruigrok & Wagner, 2001). 4. 2. 2 The ‘how’ of internationalization: the operation mode. According to Ruzzier and Konecnik (2006), operation modes are considered to be a very important way of analyzing and assessing the pattern of internationalization of firms. As known, the process of internationalization is a very difficult process.

Therefore are international operations also very difficult and dynamic in their nature. “As the firm? s international operations develop and evolve over time, pressures arise to rationalize and consolidate operations across national boundaries” (Craig & Douglas, 1996, p. 71). Meaning that firms have to improve international efficiency and that they have to facilitate the transfer of knowledge and skills. To leverage the competitive position of the firm, a strategy has to be developed in order to take advantage of potential synergies from global market operations (Bartlett & Ghoshal, 1989).

The formulation of an effective internationalization strategy is a very difficult step, but only a part of the challenge that firms face willing to enter a new market. Success in international markets depends on the ability to learn. This will have to be done by a continuous process of searching for knowledge about issues of operations management in distant and unfamiliar markets (Craig & Douglas, 1996). What Craig and Douglas also mentioned was that firms that are expanding themselves to foreign markets “need to have a proactive entry strategy instead of relying on importers, distributors and joint venture partners” (p. 5). The entry strategy for international expansion is a comprehensive plan, consisting of several individual market/product plans, which sets forth the objectives, resources, policies and goals that guide a company? s international business operations over a future period for achieving sustainable growth in foreign markets (Root, 1994). Ruzzier and Konecnik (2006) argue that there are three kinds of market entry strategies, classified in export entry modes, contractual entry modes and investment entry modes.

Export entry modes have the intention of exporting products to a foreign market, either indirect (the exporting company uses some intermediary agents in the home or foreign country), or direct (the exporting company goes directly to the customer). Contractual entry modes mean that a firm transfers technology or human skill to an entity in a foreign market. Investment entry modes involve firms having or taking ownership in businesses 20 Bart van Overbeek across borders. These entry modes are types of strategies that firms can operate to expand abroad.

Contractual entry modes include franchising, licensing and strategic alliances. Ownership by an international company of production units in the target country is an example of investment entry modes. Whereas export entry modes, which are the most commonly used entry modes for firms (Cerrato & Piva, 2007), include trading companies, piggybacking (when one? s new products use the existing distribution and logistics of another business) and countertrade (a sale that encompasses more than a trade of goods, services or ideas for money) (Carter, 1997).

To gain greater control in a foreign market, a company has to commit more resources to those markets and thereby take higher risk into account (Root, 1994). 4. 3 Summary To conclude this chapter, it has been acknowledged that expanding internationally is one of the most difficult steps a company can undertake. Internationalizing your business brings both costs and benefits, and in order to continue the expansion process, these benefits must outweigh the costs.

If a company indeed decides to expand its businesses to foreign markets, that company should take a series of patterns into account; the operations pattern, the market pattern, the time pattern and the sales operations pattern. The process of internationalization is itself an innovation within the firm (Cavusgil, 1980), and therefore a clear understanding of the „where? and „how? of internationalizing is imperative. Managers ought to know that the greater the distance between markets is, the smaller the level of knowledge about that market is (Ruzzier and Konecnik, 2006).

What is important to know, is that managers have the choice between different entry modes strategies. But also that they should have a proactive strategy towards international expanding, and should not rely on importers and joint ventures (Craig & Douglas, 1996). 21 Bart van Overbeek 5 Conclusions and recommendations This chapter will conclude the matter on the main focus of this thesis, and will show detailed conclusions on what has been discussed throughout this literature review. Also, recommendations for future research as well as suggestions for strategic management will be given. . 1 Conclusions The purpose of this thesis was to describe how family firms could expand their businesses internationally. This was done by describing the characteristics of family firms, by describing factors that affected the internationalization process and by describing a strategy plan for firms to expand to foreign markets. This section will give a final answer to the research questions and provides the problem statement with a conclusive answer. RQ1: What are the characteristics of a family business?

Family firms are, as the final definition of this thesis shows, firms that are controlled and managed by at least two members of the same family trying to sustain the company across generations of the family, whereas the individual members of the family seek for increase in degree of involvement. The “family businesses” cope with three segments, called the family, the business and the ownership and these segments need to be in balance for proper functioning. Characteristics of family-owned businesses are that they are committed to family, they are reliable and have knowledge continuity, also because of their “family language”

RQ2: What are the facilitating and restraining factors for the internationalization process? When family firms decide to expand abroad, facilitating but also restraining factors affect that process. In principle, family businesses are less inclined to grow towards international markets. They have a strong focus on their domestic markets, but not enough information and attention towards foreign markets. Family-owned businesses are more conservative and even risk adverse, which restrains them for expanding internationally. One of the facilitating factors comes forth from the characteristics of the family firm.

Family businesses are very reliable and therefore are 22 Bart van Overbeek well put in their relationships. It are these relationships that can really facilitate the process of internationalization for family firms. Next to the network of a company, also a successful succession and the willingness of the manager are drivers for international expansion. RQ3: What kind of strategy plan is needed for internationalization? Family firms have limited capital because they need to fund both the business and the family. It is this resource scarcity that has an impact on the ability to expand internationally.

Entering foreign markets brings costs, costs like governance (legislation costs) and transaction costs (exchangerate fluctuations). But it also brings benefits, such as an increase in organizational learning and knowledge. In order for a company, whether it is a family business or not, to expand internationally, it has to follow a pattern in the creation of a strategy. There are four modes for following a pattern, which are the operation mode, the market mode, the time mode, and the product/sales objects mode. This thesis focused on the operations and the target markets.

The findings were that, in order to create a strategy plan for internationalization managers and companies need to take into account the geographical and physic distance of a target market, and the intelligence about those markets that comes with it. But also, when actually entering a foreign market, there are three main strategies a (family firm) can use: an export entry strategy, a contractual entry strategy and an investment entry strategy. For every kind of business a different strategy can be used, but managers have to keep in mind that the strategy and tactics they choose will affect their business for years to come.

How can family firms expand their businesses internationally? Family firms are unique of nature. In the sense that in these kind of firms always the “family” segment influences the operations and business matters. Family-owned business should always keep the family in balance with the ownership and the business operations, otherwise family affairs would alter the course of the business in a negative way. Family businesses and their managers should always keep in mind that there are numerous factor that affect the process of internationalization, both in a positive as well as in a negative way.

Managers should always be aware of these factors in order to be successful in expanding abroad. Creating the wrong market entry plan, results in a future period of downfalls for the company, but a good market entry plan will result in revenue, information and knowledge gaining. It must be said that managers of 23 Bart van Overbeek family firms should at first know all the factors, aspects, prospects and limitations of unfamiliar markets before entering them. High levels of knowledge are needed before expanding abroad. For companies, and in this case family firms in particular, it is necessary to create a clear peration, target market, time and sales objects plan in order to clearly organize the information and knowledge about certain foreign markets. If these kind of businesses create a culture that strengthens the firm, by contributing to the terms of long-term orientation, the appreciation of values, such as commitment, sense of duty, sustainability, devotion to work and managerial willingness, and straightening a pattern of orientation and target markets, with enough knowledge gathering, internationalization is feasible. 5. 2 Recommendations and Discussion

This thesis strongly suggests a clearer definition of family firms or family-owned businesses than what has been in chapter two. In the second chapter, a definition is constructed that was the definition throughout this thesis. This definition came together as the following: a family firm is a business controlled and managed by more than one member of a family, trying to sustain the company across generations of the family and where the individuals of the company –and therefore of the family- seek to increase the degree of involvement throughout their professional careers. Of course, this definition is not complete.

Too many different approaches are being used to define the concept of family firms, therefore, future research on family firms, should at least come up with a clear and straightforward definition about family firms. The definitions in this thesis, brought by Proza (2004) and Litz (1997), were used to compose a clear and understandable, but most of all, a more complete definition about family businesses. Another recommendation is about research towards the internationalization process. Although many studies (Fernandez & Nieto, 2005; Graves & Thomas, 2006; Johanson & Vahlne, 2003; Hitt et al. 2006; Okoroafo, 1999; Senik, 2010; Su & Poisson, 2000) provides us with a clear understanding on factors that restrain or drive the process of entering foreign markets, this research is not complete. Markets and situations change over time and all the time. Many factors change markets and therefore many new factors arise throughout time that could affect the process of internationalization. Therefore, continuous empirical studies needs to be conducted in 24 Bart van Overbeek order to keep identifying these factors and being able to present clear understanding about affective international expansion factors.

Continuing on these factors, an interesting contradictory was found. Graves and Thomas (2006) found out that family firms have less managerial resources than their counterparts, the non-family firms. On the other hand, Su and Poisson (2000) stress that the willingness of managers facilitates internationalization. Because of these facts, an important question arises, which may be useful for future research: Is it still possible for family firms to expand internationally if there is a lack of managerial resources, but if the willingness of the managers is strong enough?

Throughout this thesis, many academic articles and journals were used to obtain the information needed for this thesis. While this thesis is written in a generalized setting, some of these articles were studies of companies within national borders or about branches. This means that some of the conclusion drawn up in this thesis were resulted from generalizing certain empirical studies. For instance, the study of Ruzzier and Konecnik (2006) was a case of the Slovenian Hotel Industy. However, most of the articles used throughout this thesis were general articles about small and medium-sized enterprises (SME? s).

Due to changing economies and globalization of the world and its businesses, this generalization might be accepted when looking with a broad perspective. Although this study gives a clear identification on what patterns need to be kept in mind when expanding to foreign markets, more empirical study towards this subject is suggested, because understanding about these subjects could help managers and companies to come up with an “ideal” strategy plan for international expansion. 25 Bart van Overbeek References Astrachan B. M. , & Astrachan, J. H. (1993). Family Business: the Challenges and Opportunities of Interprofessional Collaboration.

In C. E. Aronoff, J. H. Astrachan and J. L. Ward (Eds. ) Family Business Sourcebook 2. Marietta: Business Owner Resources, 535-546. Bartlett, C. A. , & Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. Harvard Business School Press, Boston, MA. Callaway, S. K. (2004), Elements of Infrastructure: Factors Driving International Entrepreneurship. New England Journal of Entrepreneurship, 7(1), 27-37. Carter, S. (1997), Global agricultural marketing management. (Marketing and agribusiness texts – 3). Rome, Italy: Food and Agriculture Organization of the United Nations.

Cavusgil, S. T. , (1980). On the internationalization process of firms. European Research, 8(6), 273–281. Cerrato, D. & Piva, M. ,(2007), The internationalization of small- and medium sized enterprises: The effect of family management, human capital and foreign ownership. Working Paper DICE, October, Universita Cattolica del Sacro Cuore Chrisman, J. J. , Chua, J. H. , Sharma, P. (2003), Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman White Paper series, Madison, WI: Coleman Foundation and U. S.

Association of Small Business and Entrepreneurship. Craig, C. S. , & Douglas, S. P. , (1996), Developing strategies for global markets: an evolutionary perspective, Columbia Journal of World Business, 31(1), 70–81. doi:10. 1016/S00225428(96)90008-3 Doole, I. , & Lowe, R. , (1999). International marketing strategy. London, Thomson Learning. Dyer, W. G. Jr, (1998) Conflictos en la Empresa Familiar (Conflict in the Family Business) , Iniciativa, January-February, 8 , 15-21. Fayerweather, J. , (1978), International Business Strategy and Administration, Cambridge, MA, Ballinger Pub Co. Fernandez, Z. & Nieto, M. J. 2005), Internationalization strategy of small- and medium-sized family businesses: Some influential factors, Family Business Review, 18(1), 77-89. doi: 10. 1111/j. 1741-6248. 2005. 00031. x 26 Bart van Overbeek Fernandez, Z. & Nieto, M. J. (2006). Impact of ownership on the international involvement of SMEs, Journal of International Business Studies, 37, 340–351. Gallo, M. A. & Cappuyns, K. (2004) Characteristics of successful family businesses, IESE Business School Working Paper, no. 542 Gallo, M. A. & Garcia Pont, C. (1996). Important factors in family business internationalization, Family Business Review, 9(1), 45-59. oi: 10. 1111/j. 1741-6248. 1996. 00045. x Gallo, M. , & Sveen, J. , (1991). Internationalizing the family business: Facilitating and restraining factors. Family Business Review, 4(2), 181–190. doi: 10. 1111/j. 1741-6248. 1991. 00181. x Graves, C. & Thomas, J. (2006). Internationalization of Australian family businesses: A managerial capabilities perspective, Family Business Review, 19(3), 207-224. doi: 10. 1111/j. 1741-6248. 2006. 00066. x Habbershon, T. G. & Williams, M. L. (1999) A resource-based framework for assessing the strategic advantages of family firms. Family Business Review, 12(1), 1-25. oi: 10. 1111/j. 1741-6248. 1999. 00001. x Hitt, M. A. , Bierman, L. Uhlenbruck, K. and Shimizu, K. (2006). The importance of resources in the internationalization of professional service firms: the good, the bad, and the ugly. Academy of Management Journal, 49(6), 1137–1157. Hofer, C. W. , & Schendel, D. , (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN. West Publishing Hollander, B. S. , & Elman, N. S. (1988). Family-owned Business: An Emerging Field of Inquiry. Family Business Review, 1(2), 145-164. doi: 10. 1111/j. 1741-6248. 1988. 00145. x International Finance Corporation (2010).

Family Business Governance Handbook (2nd ed. ) Washington, DC: Author Johanson, J. & Vahlne, J. ,(1977), The internationalization process of the firm: A model of knowledge development and increasing foreign commitments. Journal of International Business Studies, 8(1). 23–32. Johanson, J. & Vahlne, J. E. , (2003),Business relationship commitment and learning in the internationalization process. Journal of International Entrepreneurship, 1. 83-101. Kets de Vries, M. F. (1993). The dynamics of family controlled firms: The good and the bad news. Organizational Dynamics, 21(3), 59–71. doi:10. 1016/0090-2616(93)90071-8 7 Bart van Overbeek Knight, G. A. (2001). Entrepreneurship and strategy in the international SME. Journal of International Management, 7(3), 155–171. doi:10. 1016/S1075-4253(01)00042-4 Knight, J. (2007), Internationalization Brings Important Benefits as Well as Risks. International Higher Education, the Quarterly Publication of the Boston College Center for International Higher Education, no. 46, 8-10. Leonidou, L. & Katsikeas, C. (1996). The Export Development Process: An Integrative Review of Empirical Models? , Journal of International Business Studies, 27(3), 517– 551 Levering, R. , & Moskowitz, M. (1993).

The ten best companies to work for in America. Business and Society Review, 85(1), 26–38. Litz, R. A. (1997). The family firm? s exclusion from business school research : explaining the void; addressing the opportunity. Entrepreneurship Theory and Practice, 21, 55-72. Lussier, R. N. & Sonfield, M. C. (2004). Family Business Management Activities, Styles and Characteristics: A Correlational Study. American Journal of Business, 19(1), 47-53. Retrieved from http://www. bsu. edu/mcobwin/majb/? p=109 O? Grady, S. & Lane, H. W. (1996). The psychic distance paradox. Journal of International Business Studies, 27(2), 309-333. oi:10. 1057/palgrave. jibs. 8490137 Okoroafo, S. C. (1999). Internationalization of family businesses: evidence from northwest Ohio, USA. Family Business Review, 12(2), 147-158. doi: 10. 1111/j. 1741-6248. 1999. 00147. x Olson, P. , Zuiker, V. , Danes, S. , Stafford, K. , Heck, R. , & Duncan, K. (2003). Impact of family and the business on family business sustainability. Journal of Business Venturing, 18(5), 639-666. doi:10. 1016/S0883-9026(03)00014-4 Poza, E. J. (2004). Family Business. Mason, Ohio: Thomson-Southwestern. Root, F. R. (1994). Entry strategies for international markets.

New York, NY: Lexington Books Ruigrok, W. & Wagner, H. , (2003), Internationalization and Performance: An Organizational Learning Perspective. Management International Review, 43(1), 63–83. Ruzzier, M. & Konecnik, M. , (2006). the internationalization strategies of SMEs: the case of the Slovenian hotel industry, Management: Journal of Contemporary Management Issues, 11(1), 17-35. Senik, Z. C. (2010). Models, processes and factors influencing internationalization: The case of malaysian SME’s (PhD Thesis, Murdock University, Australia). Retrieved from http://researchrepository. murdoch. edu. au/1661/ 28 Bart van Overbeek

Haven’t Found A Paper?

Let us create the best one for you! What is your topic?

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.

Eric from Graduateway Hi there, would you like to get an essay? What is your topic? Let me help you

logo

Haven't found the Essay You Want?

Get your custom essay sample

For Only $13.90/page