Is internationalization the most difficult operation in business?

This essay is the start of a series in which we will examine the different models and doctrines that a company can develop in their operations when commercializing their products, thinking from the perspective of recent and classic business management research.

TL;DR version: 
Internationalization is challenging. It has been the subject of plenty of research. Dr. Reijo Luostarinen was a guru, as are several Swedish network-theory professors. The proven and tested models are still useful, and their findings are still valid. Let’s use them and learn what is already known. Let’s not reinvent the wheel. Let’s create new growth in Finland. Right now. Together.

The golden oldies are still valid

Internationalization and the application of its models has been one of the most important and complex areas of development for management and business science in the last 40 years. In the early 1990s, when I was studying International Business at HSE (Aalto University), the legendary professor Reijo Luostarinen introduced me to several essential keywords and terms.  

These memorable models included e.g. multiple “product-operation-market” (P-O-M) market access strategies and their variations; small open economies (SMOPEC = Small and open economies), such as Finland; and multiple operation modes with bizarre-soundingabbreviations and behaviors. The terms still apply very well to descriptions of Finnish international business characteristics and growth challenges.

The niche market is clear and progressive

In the 1990s, a major part of the education we received as 20-something economy students took a practical form through inspiring Finnish cases, such as the growth stories of Vaisala, Rapala, Nokia, Amer and Polar. One unifying factor in all of these was finding and focusing on your own niche and building through it. Focusing on where you are can be very positive. A Finnish firm going international is almost always a very small player in foreign markets. 

The second strong business management thinking model at that time was, and still is, the step-by-step model for internationalization. In a nutshell, this means that, as the corporate leadership and personnel grows into international markets and operations, its commitment and hunger for further operations increases. This courage grows with minor partial successes and failures. It’s about learning by doing.

A pike is a small fish

During his lectures, Dr. Luostarinen compared Finnish companies to the biggest pike in the reeds of Lake Päijänne. These pike would surf across the Baltic Sea into the Atlantic and encounter sword whales. Then, they would quickly realise they were very little fish, after all. Reijo’s way of adding more sauce to this story was to bring out examples of massive Rapala lures from his decades-old Cavalet suitcase and to tell us: “check these out – isn’t it bjuuutiful,” in his strong Finnish accent.

Then, he extended the narrative to explain that these specific lures just happened to catch fish all around the world. The story was so great that I think everyone in that classroom will remember it forever. Long live the Rapala lures! A small niche – but the best product in the world and an outstanding story behind it. The Finnish way to go to market. Of course, in this case, Rapala’s courage grew from one market to the next, with success in sales and growth through partnerships. It was an encouraging and memorable case study. 

We need hundreds more new cases like this to support our country’s growth in the 2020s. Furthermore, one has to question if it is enough to just have great products anymore in the globalized economy. One needs to be able to package them into highly profitable products and offer them to customers via complex business networks or even directly via digital channels.

Retro is still pop, even from the prophet

In retrospect, I reviewed the conclusions of Reijo’s outstanding dissertation, and the table below lists the key findings. Although the work was published in 1979, with our infamous President Kekkonen in control and the Soviet Union still in existence, the ideas and conclusions could easily have be written today.

CharacteristicsDescription
LATECOMERFinnish companies are significantly behind other countries in their internationalization, are less resourced and have less knowledge of the situations and requirements of different markets. As they go abroad, they face fierce competition and strong defense from more experienced companies. Generally speaking, Finnish companies are clearly behind their toughest rival countries and very often lack the “business instinct” needed to seize the opportunity with pace.
SYSTEMATIC MODELOne of the most important ways to succeed is to avoid ad-hoc activities at all costs, as doing so will result in wasting scarce resources and skills. Businesses need to be able to create a model that builds a systematic market approach for managing offerings and developing international operations. This must be firmly anchored in strategy, the company’s core knowledge capital and its capability building. One has to solidly know how to chain small breakthroughs into larger action sequences.
LONG-TERM FOCUSSuccess in internationalization is a long-term investment. It requires significantly more commitment and investment than operating in the domestic market. Internationalization takes place in smaller, bigger and smaller steps. 
It always requires long-term commitment from management to change and the ability to adapt to changing market situations and cultural differences across countries.
PROCESSBecause internationalization is always a process, it requires process-oriented expertise those implementing it. Furthermore, it calls for the ability to lead complex value chains, such as: “decision making -> business impact -> offering delivery -> quality control -> reporting”. In addition, it requires strong entrepreneurial leadership, the willingness to succeed and the strength to withstand failures.
KNOWLEDGE AND MANAGEMENT EXCELLENCEIn order to manage the complexity of the market, a company needs better knowledge of what is happening where, by whom and what this means in relation to its own activities. Sensory metrics, BI systems, triggers and control mechanisms need to be created and applied at exactly the points and hubs where change occurs and opportunities are realized. However, knowledge alone is not enough: one must know how to act and seize opportunities quickly. Have the instinct to make business.
LATERAL RIGIDITYFinnish internationalization is characterized by “lateral rigidity”. We are not sufficiently exposed to international impulses and influences. This is due in particular to our geographic remoteness and our rather distinctive and strong domestic culture and language.
EXPOSURE TO INTERNATIONAL INFLUENCE
Companies in our country should work actively to eliminate these sources of rigidity through internal and external internationalization, by systematically exposing its staff to foreign influences, by demanding and driving personnel to experience tougher competition, pace, demands and competition from abroad, by hiring more foreign experts into the home organization and the creation of a multicultural culture.
PACE AND FOCUSInternational success stems from the company’s ability to create an innovative approach, operation, management and information model. The key to becoming faster and more agile is to find the niches and opportunities that companies in the biggest markets have not yet been able to notice and grasp.
COOPERATION AND NATIONAL STRENGTHFinland needs a strong national competence program for commercialization and international growth. This calls for current and future business leaders and their staff to be able to work in international networks and to seek opportunities for growth. Only in this way can we increase the creation of new jobs and increase income for Finland.

Source: adapted from Reijo Luostarinen, Internationalization of a Firm , 1979

Fast forward growth – when the start-ups fought

However, as early as the 1990s, there were also two other major ideas that significantly revolutionized thinking. The first was that some start-up companies were able to overtake the step-by-step model due to their digital technology and innovation capabilities. To grow directly into a global company, for example through the App Store, a Finnish company could first go to Sweden or Germany and then slowly move on. This model is called Born Global (BG) .  

BG companies have already shown that the process of internationalization can indeed be accelerated. However, only a few companies have been able to ignore one critical issue related to internationalization: the importance of local cultural knowledge and personal networks for success. You can sense this spirit every year at the Slush event in Helsinki. Entrepreneurs on the verge of growth peaks and world conquest fiercely seek funding at a plethora of occasions. Yet, they meet face to face, exchange cards, build trust and build networks just like before – from people to people. They are digitally connected and informed, but still behave as people always have. Trust is created by meeting up.

Networks are the key to success

The second key theme from the 1990s, closely related to internationalization, is network theory. In brief, it means that an internationalizing company invests in building the strongest possible positions in its target countries via networks between actors (people and companies), resources and activities. By improving these positions, the internationalizing company can both better understand the needs of customers and business partners now and in the near future, and, at the same time, find new customers. Networking is a systematic operation of long-term strategic investment and it has a proven track record of high returns and a positive impact on internationalization success.    

Swedish models and doctrines

Launched by Swedish professors Johansson, Vahlne and Mattson, the IMP research group has been one of the pioneers of network thinking. It may even be argued that the reason behind the Swedish economic miracle may well be, in part, the idea that succeeding in international business is not about excellence in products and technology, but about the benefits they bring to the right market at the right time. 

You need to be present in the mind, influenced and exposed to discussions in the real circles where decisions are made, where ideas for problem solving are created, and where requirement definitions are created for potential solution vendors. Here, we Finns think we have a real talent for scaling up, but we need to invest heavily in network development, relationships, market presence and staff development. And, as our dear neighbours already do, calculate the economic returns from this. 

Towards new growth for Finland

In his book published in October, Finnish CEO, Björn Walhroos, calls for a strong update of the Finnish story. “Growth-Finland” (e.g. manufacturing & value-adding services) needs a new model in which it can continue to thrive. According to him, “Digi-Finland” will succeed with its growth model and continue to enrich success stories, like Supercell. 

However, it is more critical to create and strengthen companies and growth stories that can attract thousands of new employees beyond the digital economy. These companies are particularly present in manufacturing-related industries and services. Dozens of smaller, successful businesses and new businesses that create new growth from the vast international market need to be created. We need Mittelstand-company-driven growth for Finland. Finland still prospers via export growth. To grow, we need to join our best brains and forces together to transform our destiny.

Proof’s model for developing internationalization thinking

We have combined the above theoretical models into one to form a preliminary working model to broaden and deepen our internationalization potential. The model can be simply understood as: even a very strong domestic market position does not guarantee any success in the international market. We need to be able to create networks in the target market where success is possible. And to reach those positions, we need to build strong go-to-market strategiesthat can leverage all the best practices, management lessons and operating models. How we lead people from diverse cultures and knowledge of different operating environments in the midst of change will be especially important for success.

We will continue to develop this thinking in the future with our clients and partners. If you have ideas or improvements, let’s discuss more!

Together with our customers and the Proof network, we aim to create dozens of new international growth stories. Times are tough due to Corona. Yet, this disruption creates more opportunities now than ever before.

Tommi, Senior Advisor