Difficulties Facing Irish Technology. Companies Exporting

Transcription

1 norma smurfit library national college OF IRELAND Difficulties Facing Irish Technology Companies Exporting (With Particular focus on companies selling business to business) By: Ciaran Jones 2001 National College of Ireland, Sandford Road, Dublin Supervisor: Dr. Brendan Mac Evov Submitted in partial fulfillment of the requirements for the B.A. in European Business Studies & Languages

2 Acknowledgements The author, would like to thank the following people for the help and advice received throughout the course of this dissertation: Dr. Brendan McEvoy ( supervisor) Ms. Joan Fahey for all the help with the graphs. Members of staff of Enterprise Ireland, especially Mrs. Jennifer Condon, Ms. Judy Blackmur and Mr. Larry Moan for all their time and information. Members of IBEC. Representatives from all the companies surveyed for there much appreciated feedback and information. And finally, my mother & father for all of their invaluable advice and guidance.

3 Abstract International Trade is as old as man himself. From the early Chinese and Indian Traders (5/6000BC), International Trade has developed in various empires - Egyptian, Greek, Roman, German and British (Industrial Revolution ), through to US Industrial leadership ( ) and the post World War II leadership of Japan. However, with advancements in technology in recent times, the world has become a smaller place and the amount of international trade has increased between countries. Advancements in technology have also meant that the type of goods traded between countries has changed. Ireland, which was known as an agricultural country in the past, is now the second largest exporter of computer software in the world. However, along with these changes in the types of goods exported, new difficulties have emerged

4 "The global imperative is upon us! No longer merely an inspiring exhortation, thinking and acting globally is the key principle for business success. Both the willing and the unwilling are becoming participants in global business affairs. No matter how large or small your business, ready or not, here comes the world". Czinkota et al (1995)

5 J Table of Contents (i) (ii) Acknowledgements Abstract Chapter 1. Introduction 1 Chapter 2. Overview Introduction Internationalisation and Export Theory Factors affecting Export Activity Irish Technology Sector Issue Common to all Irish Firms Irish Companies Experience Summary 21 Chapter 3. Research Methodology Research Question Research Methodology 25 Chapter 4. Findings and Recommendations Introduction Problems Relating to Markets Staffing and Management Competency Financial Aspects Current Downturn in the US Market Remote Location / Distance from Markets Small Size of Domestic Market Cultural / Business Style Differences Summary.43 Chapters. Conclusion 45 B ibli o graph v 49 Appendices. 52 Appendix 1: Questionnaire sent to technology companies 53 Appendix 2: Questionnaire sent to members of Enterprise Ireland 56 Appendix 3: List of companies surveyed 59

6 CHAPTER! Introduction 1 -

7 Introduction Over the past number of years the make up of Irish exports has changed considerably. Traditionally Irish exports comprised mainly of goods such as agricultural produce, dairy products and beverages. In fact, most foreigners would probably list Guinness or Waterford Crystal as examples if asked what goods they associate most with Ireland. Although these traditional exports are still significant, there is now a much greater variety of goods being exported. The business environment in Ireland, as we all know, has transformed in recent times. The government invested heavily in technical education since the 1970 s. As a result large MNC s were enticed into the country on the bass of our high-tech workforce coupled with attractive tax breaks given to them by the government. These MNCs started operations in industries such as the computer industry, the pharmaceuticals industry and the electronic components industry. This in time changed the face of Irish' exports as a larger variety of goods were being exported from the country. In addition to components and finished products, foreign companies in Ireland began to produce software manuals in various languages (localisation), and then became involved in the actual development of software in the exploitation of new. technologies such as e- commerce. These activities fall under the heading of internationally traded services. However, more recently, numerous indigenous Irish ITS companies have been set up. In particular Irish technology companies have been 2 -

8 established in areas like software and communications. Of course traditional Irish goods are still being exported around the world, but as demand in the t ' markets changes, an increasing amount of new technology companies are being set up. Ireland is now developing a strong reputation for its high quality technology goods and services. The electronics/it/telecommunications sector now generates 1/3 of Ireland s exports. Most of the worlds leading computer and chip manufactures have Irish operations and many Irish owned companies have become t- international operators. Indigenous turnover from 1988 to 2000 was up by almost Vi with exports up around 70% and domestic sales over 30%. Figure 1.1 below, shows the increase in the amount of new technology companies being started up every year since the.late 1980's. Figure Source, Enterprise Ireland

9 The indigenous technology / software industry in Ireland is expected to > 0 maintain its rapid growth. The current success of this industry can be exemplified by the fact that Ireland is currently the second largest exporter of software products and services in the world. Many technology / software companies are founded on the basis of technical expertise or product innovation. As companies grow however new requirements emerge. Successful growth requires technical expertise to be complemented by skills in areas such as human resource management, strategic planning and strategic implementation as well as a clear knowledge of the market. The challenge facing the technology industry, is to keep a clear strategic focus in a dynamic operating environment. This report highlights the difficulties / challenges faced by indigenous Irish technology companies exporting. The report also outlines various solutions to these difficulties /. challenges.

10 CHAPTER 2 Overview

11 2.1 INTRODUCTION The objective of this chapter is to attempt to give the reader an insight ( into past and present export and internationalisation theory. It also attempts to give the reader a background into the Irish technology/software sector and highlights the reasons why firms undertake exporting and the advantages and difficulties that are associated with the activity. Finally, it looks at first hand experience of these technology companies in exporting and the challenges that they face. 2.2 INTERNATIONALISATION AND EXPORT THEORY Beamish (1990) (pp.77) describes internationalisation as the process by which firms both increase their awareness of the direct and indirect influences of international transactions on their future and establish and conduct transactions with other countries. This recognises that there are both behavioural and economic aspects to internationalisation.. It also implies that internationalisation is both dynamic and evolutionary in that relationships created through international transactions might help a firm evolve into other markets.. Evidence suggests that firms continue with internationalisation based on experience and success gained from each market.

12 Morgan and Katsikeas (1997) and Paliwoda (1993) explain that the traditional school of thought was that firms internationalised through a stages process. They explained that Uppsala model is highly influential in this school of thought. This model sees internationalisation as a process whereby firms gradually increase international involvement as they build up intelligence from foreign markets and operations. This then results in a greater commitment of resources to foreign sales. This could happen by expanding firstly into immediate neighbouring markets.. In doing this a firm could reduce perceived risks and overall uncertainty as the culture and values of this neighbouring country are close to their own. For example Irish companies might start exporting firstly to Britain due to our similar culture, common language and good knowledge of the market. According to the Uppsala model, market knowledge is acquired mostly from the experience of operating in the foreign market concemed.this experience is said to be country specific and not easily applied to other foreign markets, but the experience gained generates further business opportunities, reduced market uncertainty and hence an incentive to increase the firms international operations. The model also outlines the only other circumstances in which additional commitment to internationalisation will occur other than in these incremental stages. These are when (a) firms have large resources and consequences for them are small, (b) when the market is stable and (c) when relevant market knowledge can be obtained in ways other than experience.. 7

13 More recently, the view has been taken that internationalisation depends on an organisations network of relationships and not market specific intelligence. Therefore, extemalisation rather than internationalisation occurs. This perspective of networks stresses the role and value of social relationships in business transactions. In reality, it is alleged that firms often enter straight into foreign operations as a strategic choice depending on market conditions. Nevertheless the stages theory continues to command substantial support from modern-day investigations* Fletcher (1998) highlights four important areas in internationalisation: 1. The need to develop a global vision or image of the world. This applies to all firms regardless of size. This means keeping up to date with market trends, competition, rivals, merger and joint venture activity within the industry segment. 2. The importance of a visionary leader or person to champion the internationalisation process. International business strategy should integrate structure, culture, performance, orientation and should be both bottom up and top down*. Reactive internationalisation can be shifted into gear by building on knowledge and experience gained in order to take this further step into proactive internationalisation. However, the greatest success will be in cases where there is a fusing of corporate organisational structure and international activity. 8

14 3. Internationalisation proceeds by an incremental growth process whereby experience and learning is gained in different stages and steps in different markets at different times. For traditional Irish exporters this has often included a sequence of stages up the learning curve. Northern Ireland, Great Britain, Netherlands, Benelux progressing to France or Germany. / 4. The importance of transaction cost analysis for examining contracting, subcontracting or co-operative activity in a cross border context. Also evaluation of inter-organisational networks in both home and cross border contexts can provide wide resources in terms of contracts, information and opportunities. These should be exploited more fully. Other important areas in internationalisation are networking and relationships, proactive and reactive approaches and strategic uses of the Internet. Paliwoda (1993) outlined the incremental model, which identified three stages of internationalisation.. The first stage was a stimulus for international involvement. External and internal stimuli were needed for firms to begin exporting, such as unsolicited orders from buyers or distributors abroad.. The second stage was active international involvement. This involves the exploration of marketing opportunities imposing demands on the resources (financial, managerial, marketing etc) of the firm, which will test the willingness of management to allocate these resources.. Smaller firms may not be able to commit these resources and management s experience based on 9 -

15 perceptions of exporting may also affect this stage. The third stage is committed international involvement.. This is when the firm becomes committed participants of the export market. Traditionally, evidence has shown that only the larger firms are likely to export, but now. with Internet marketing even small firms have the capability to reach markets around the world. The Internet helps SMEs overcome barriers to entry, facilitates in the appointment of agents and distributors and is a useful tool in the screening of markets. Quelch and Klein (1996) argue that the Internet will revolutionise the way international commerce is carried out and will lead to more rapid internationalisation of SMEs. The Internet will reduce the competitive advantage of the larger companies in many industries making it easier for smaller companies to compete internationally. Global advertising costs will be reduced, as the WWW, allows for cheaper advertising. Also small companies offering specialised niche products will be able to find the critical mass of customers necessary to succeed worldwide through the Internet. 2,3 FACTORS AFFECTING EXPORT ACTIVITY Leonidou (1996) reviewed thirty empirical studies since the 1960 s and found the main motivators to export activity to be (a) company objectives and resources, (b) personal characteristics of decision makers (international orientation, style) and (c) the availability of export facilities and government support. Mixed evidence emerged as to the effect of these motivators at different stages of a company s development and also whether firm size and 10 -

16 experience affects these motivators. SME s are in general less aware of the potential benefits of exporting, are less knowledgeable of how to go about exporting and are less confident in their ability to export. This is due to the fact that SME s business systems are normally smaller than larger firms which means that employees have multiple responsibilities and the organisation is not in place to handle all the documentation involved in exporting. Dicht et al (1990) further studied the main motivators to export activity and suggested the foreign market orientation of an SME s manager is a crucial determinant in the decision to go international. Managers who were older, less well educated, lacking in language skills, not well travelled, unwilling to take risks and unwilling to change were less likely to engage in export activity than smothers.. He also suggested that managers who had an above average physic ^, distance, from foreign countries were less likely to engage in export activities. Physic distance concerns matters such as the language, business practices, culture and economic development of another country. Gripsrud (1990) however found that physically distant markets could become so important that firms would enter them anyway. He surveyed 107 Norwegian exporters of fishery products to Japan and concluded that this was more likely for larger businesses. He also found that the greater the company s expert experience the less important the physic distance was. Bennett (1996) examined why some firms are unable to undertake exporting. One of the most common reasons was the problem of recruiting and 11 -

17 holding on to staff with the necessary skills for selling abroad. For example, language and international trade skills. Other reasons were the high costs of agents and distributors, the costs involved in carrying out market research, the distance from the markets and the high degree of management needed to handle all the export documentation. There was also found to be concerns over financing the period of time between the receipt of orders and the receipt of payment for the goods. He also stated that changes in the economic, social or political climate of a country, also affects decisions to start exporting as it increases the degree of risk involved. AIB (1999) in their guide to international trade put forward some general objectives of exporting for Irish firms. These included increasing profitability and utilising production to its full potential as well as the fact that the opportunity for growth might not be available in the small home market. Spreading risks over a number of markets could increase the security of a company, and the competition in international markets would ensure that products are kept up to date. Also companies with specialised products may not have enough customers in the small home market The guide also states that in order to commence exporting the firm must have an exportable product with a competitive advantage, adequate finance and a deep commitment to make the venture work.the firm must also take into account other considerations such as overseas marketing expenses, product design and adaptation for the foreign market, additional stocks and credit and customer servicing. 12 -

18 Roger Axtell (1997) speaking from an American perspective highlighted some of the most common advantages of exporting to a company. Studies have shown that increased products and faster growth are more likely in companies who export. Also, more sales through exporting increases productivity by more fully, utilising staff to meet the orders. Exporting helps to smooth out seasonal fluctuations and cushion declines in the home market. Overhead costs can be spread over the different markets and as new markets are opened repeat orders begin to appear. Being subjected to new competitors in the export market forces firms to increase competitiveness by continually innovating their product through research and development. Increased competitiveness is then transferred to the home market. Finally, exporting to new. markets often allows a firm,to prolong the life of their current products and even helps dispose of obsolete models. Axtell (1997) later goes on to describe the most common mistakes of potential exporters as compiled by the U.S. department of commerce in Failure to develop a strategic international marketing plan before starting to export and insufficient commitment by management to overcome problems were chief among the mistakes. Lots of mistakes were made by potential exporters regarding distributors such as insufficient care in selecting them, a lack of training and monitoring of the distributors and failure to treat international distributors on an equal basis as domestic ones as regards discounts, sales promotions, warranties etc. Another common mistake was the failure to modify products to meet regulations or cultural preferences of foreign

19 countries and failure to print labels, instructions and warranties in locally understood languages. Also many companies were found to neglect their export business when the domestic market boomed. Finally, the failure to consider using an export management company to handle the firm s exports when it can t afford an export department can turn out to be a big mistake. 2.4 IRISH ELECTRONICS SECTOR Anna Nolan (2001) explains that the electronics sector in Ireland has its origins in a strategic effort by the IDA to attract foreign owned high-tech companies to Ireland. In many cases, with individual companies the strategy was to attract them to set up assembly type operations. These companies were tempted with grants for employment, training, capital investment but more importantly a favourable corporate tax regime and a ready supply of a highly educated workforce. Once these firms had confidence in the workforce they then set up other types of operations to complement the assembly operations such as marketing, R & D, financial and other support services. Former Irish managers of these multinational (MNC) companies then went on to create many of their, own successful indigenous high-tech companies with the experience they, gained. Fontes and Cooms (1998) further describe the relationship between these large multinationals and local indigenous firms. They outlined evidence that local indigenous firms begin the internationalisation process through 14 -

20 developing networks based on their supply, and relationships with MNCs located in their home market. Economists have argued for many years that these MNCs by their presence in their Market transfer technology to local industries and therefore it can be expected that the knowledge and expertise to internationalise will also be transferred. They also suggest that access to foreign technology will be achieved by (a) participation in international collaborative R & D projects, (b) partnerships with foreign companies in similar fields, (c) integration in international networks in their field of activity and (d) usersupplier. relationships with large foreign companies acting in local areas. Enterprise Ireland (a) (1999) characterises the high-tech market as being volatile and open to,sudden change. This is due to several reasons. New products and applications appear rapidly and some of these are revolutionary changing the market almost overnight. For this reason shorter product life cycles and smaller market windows are becoming the norm. Also the Internet has revolutionized the way companies communicate with their customers. For software and services only a small proportion of sales are generated in the domestic market. The UK is a stepping stone market but doesn t hold a high proportion of total sales. The Eurozone is important but fragmented when compared to the U.S. The U.S. is a high priority, but is the most difficult and expensive to penetrate. Price is not the key purchasing criteria in this sector. National preference is not a problem as customers want value and language is only important when companies provide local support services. Figure 2.1 on the next page, shows the percentage of Irish exports sent to the various markets. 15 -

21 Figure % 50% 40% 30% 20% N 10% 0% Enterprise Ireland also identifies that competition is strong for the.irish high-tech companies especially in the U.S., which is Ireland s fastest growing export market. The entry costs, logistical problems and complexity of the market can cause difficulties. The U.S. market is an obvious choice for Irish companies because of our shared language, its size and its openness to technology. However, Enterprise Ireland warns that the U.S. market should not be seen as a bigger version of the Irish market due to its large, aggressive and. multicultural nature. 1.5 ISSUES COMMON TO ALL IRISH FIRMS Enterprise Ireland (2001(B)) outlined many issues common to all Irish companies these days. Recruiting and retaining staff is becoming a major 16 -

22 problem due to explosive job creation, an increased standard of living and difficulties in housing and transport. Also, skills needed for exporting in the Eurozone such as language skills, knowledge of local cultures, technical product knowledge and appropriate business skills are in short supply. These skills are mandatory for Eurozone exporting. The journal also points out that increasing inflation in Ireland means that firms are becoming less competitive in the export market. A number of firms in the high-tech sector are now outsourcing some of their production to decrease costs. In addition sourcing raw material has become more expensive especially in the UK, because of their strong exchange rate. Another trend examined in the journal was the whole area of market intelligence. It stipulates that market intelligence has to be timely, of top quality, accurate and specific to the firm. Exporters targeting niche markets with, limited customers are starting to define their markets in terms of companies and; not countries, which means that intelligence has to be of high quality. The report also found that many firms in the software sector find that the services provided to support the product are more valuable than the sale of the product itself. This trend is particularly true for the Eurozone Forfas (2000) described that when going international, firms have to adapt what they have learned in the domestic market to the circumstances of the i new country and new customers. New business should start with the challenge of the domestic market before going international, as a solid domestic market teaches you the basics of marketing your product and provides cash flow and 17 -

23 financial credibility to enter overseas markets. It says that exports should not take place until opportunities are fully exploited in the home market. However, a trend is occurring particularly in the software /. IT companies where there is no pre-export phase but instead an R & D phase and then a move to global markets. The implications of this phenomenon are that many companies in this sector were completely unprepared for marketing and export development. Indications were given that apart from an odd seminar no training was received. It also goes on to describe other problems such as conventional trade barriers* transport, currency and credit ratings as obvious problems when exporting. In some new markets, issues such as technical standards, competence or constantly rethink servicing requirements*are critical. Cultural conventions ^ v : may also present their own challenges. \ : 2.6 IRISH COMPANIES EXPERIENCE Drury Research (2000) in a report prepared for Enterprise Ireland J investigated the key issues facing their client companies. Consistently since 1998, the key strategic issues facing these client companies were identified as follows: Managing growth. Coping with the increasing globalisation of their market place. Developing the skills to manage change. Acquiring assistance and advice for start-up and new. product developments in Ireland and abroad. 18 -

24 Acquiring financial assistance for marketing and capital investments. Benchmarking against best practice L developing world-class systems. Mentoring/learning from other companies that have faced similar issues to themselves. Improving capability as opposed to capacity. Improving competitiveness. More recently, in and 2000, dominant key issues that face clients center around: Skills shortages. Staff recruitment and retention and Developing HR strategies and management capability in this general area. The report then goes on to summarise these needs by pointing towards a. need for consultancy and customised support from Enterprise Ireland in addition to specific services and financial supports. The consistent theme emerging since 1998 is this consultancy, requirement. This suggests that firms place a lot of value on the considerable expertise and market knowledge that resides within the agency. It is important to talk about Irish companies1experience in America, as it is the main destination for most of our software exports. Performix Technologies (2001) who won the Irish Software Association s award for the new company of the year in 2000/2001. spoke about their experience in the 19 -

25 North American market. Due to the size of and distance to the North American market they are constantly challenged to manage their remote offices / employees. They found that everything costs at least twice as much as expected but when viewed in the larger scale of things the opportunity is greater. Market penetration and brand awareness are core in the US, with PR companies costly but valuable. Performix (2001) view networks as important in the US as they are in Ireland. The 40 million people of Irish extraction however don t necessarily offer any advantage when it comes to networking but it can be created via legal firms, PR companies and banks. From their experience having the right blend of people with the necessary skills is of paramount importance. Having said that, finding and retaining the right person for the job is difficult and expensive. Also, for them, having a senior person with a presence in the US is critical. Finally they found that success in the market can be accelerated via the right Venture Capital partner. Performix (2001) later go on to describe challenges that they perceive face Irish companies in the US. US companies have the advantage of a larger domestic market and better networks. Partners with deeper pockets often fund US companies better at earlier stages. Accepting the fact that everything costs much more. Attracting top US talent. 20 -

26 The US needs to become a powerhouse and not just an overseas market. Network 365. (2001), a strong new. indigenous Irish technology company who specialize in wireless communications described their experience in building an international business. They explained that due to the global nature of the market they had to differentiate their product to compete affectively. They also said that a strong local presence and focus was necessary to succeed in these markets. They later went on to describe challenges they had to overcome after taking the decision to go international. These included aspects such as the different cultures and business styles of foreign markets. They also highlighted" j the distance from the markets, a lack of visibility and a lack of decent contacts. as being challenges. Finally, balancing the need to expand globally with the need the need to manage the rapid growth of the core R&D. center is a constant' difficulty. 2.7 SUMMARY Through extensive reading of literature on different internationalisation and export theory, it is clear to see that since its inception in the early 1970s the Uppsala model, as described by Paliwoda (1993), has continued to enjoy, the most respect. Despite several theorists making their own modifications to the model over the years the general framework of he model of the model still best outlines the way in which companies approach internationalisation. 21 -

27 It is also evident from the literature that the whole process of internationalisation is subject to many, different factors. Leonidou (1996) explained some of these factors that affect the decision to go international, namely a company s resources, the international orientation and style of management and the availability of export facilities and government support. However as Roger Axtell (1998) pointed out, once initial obstacles are overcome the advantages of exporting are numerous. Some of the most obvious advantages are increased profits, faster growth and increased productivity. Through investigating the history of the Irisli electronics sector it can be concluded that the government and large MNG s who set up a presence in Ireland were the two main influences behind its origins. The government exercised its influence through initiatives:such as its favourable tax regime and. investment in education, which led to a highly educated workforce. The MNCs exercised their influence through the passing on of expertise and superior management practices. Nowadays, it is clear to see through the experience of Network 365 and Performix that indigenous Irish technology companies have many challenges to overcome in the various export markets. However, there seems to be a lack of literature from an Irish perspective dealing with these challenges/difficulties. In the following chapters an attempt is made to address these challenges and difficulties in greater depth. 22 -

28 CHAPTER 3 Research Methodology 23 -

29 i 3.1 RESEARCH QUESTION During my research into exporting and internationalisation I found that most of the literature was written from an American perspective, written by American theorists and highlighted difficulties and challenges specific to American firms. Literature on exporting and internationalisation from an Irish perspective mostly, speaks about the problems generally encountered by firms from all Irish industries rather than outlining the problems specific to individual sectors like the indigenous technology/software sector. Therefore, this thesis is going to investigate the difficulties and challenges faced by indigenous Irish technology companies in their export activities, but in particular technology companies, which sell business to business. The research will try to prove that the technology sector in Ireland experiences difficulties and challenges unique from any other sector and because of this requires unique solutions to its problems. 24 -

30 3.2 RESEARCH METHODOLOGY The objective of this survey was to identify the main challenges faced by indigenous Irish technology companies in their various export markets. Both primary and secondary data were used during the course of the research. The primary data came in the form of interviews and questionnaires. The secondary, data was in the form of books, conference notes, journals, Internet sites and reports. Qualitative Research was used to carry out this survey. As pointed out by Strauss and Corbin (1990), qualitative research is any kind of research that r- produces findings not arrived at by means of statistical procedures or other means of quantification. This type of research was used, as the author wanted the interviewees to speak freely about the topic and it also allows for the opportunity to probe more deeply into the behaviour / motivation of Irish entrepreneurs. Both interviews and questionnaires were used to accumulate information on the subject and both were divided under two headings: The pre-export phase & The export phase 25 -

31 1. Firstly, an exploratory, interview, was carried out at an early stage. As Oppenheim (1992) outlined, the purpose of exploratory interviews is to develop ideas and research hypothesis rather than to gather facts and statistics. It is concerned with trying to understand how ordinary people think and feel about the topics of concern to the research. This interview was carried out with Enterprise Ireland s national software director, Ms. Jennifer Condon. Jennifer Condon has an in-depth knowledge of the Irish technology/software sector and is up to date with the challenges and difficulties faced by companies in the i sector due to her ongoing dealings with technology companies. The objective of this interview was to gain a better insight into the current state of the Irish technology/software market through the expertise of the interviewee, and to couple this knowledge with information already obtained in the literature review to create valid and informed questionnaires. As Oppenheim (1992) explained the job of the depth interviewer is not that of data collection but ideas collection. The details of the interview are given in Appendix 3 and in the bibliography. 2. Two different questionnaires were drawn up for the purposes of this thesis. The reasons that questionnaires were chosen at this stage were: The low cost of data collection The low cost of processing Avoidance of interviewer bias & The ability to reach respondents who live at widely dispersed addresses at home or abroad. 26 -

32 Also, when compared to other methods, questionnaires permit for the survey of a greater number of people in a shorter period of time. The questionnaire incorporated both open and closed questions. Open questions were included as the author wanted to encourage freedom and spontaneity in the answers and they also allowed for the opportunity to probe. The first of two questionnaires was sent to representatives of Enterprise Ireland. These questionnaires targeted people in the organisation who had valuable, up to date information on the most important markets for Irish technology exports, namely the US, the UK and Europe. For example, questionnaires were sent to the San Jose office, which deals closely, with the Enterprise Ireland incubator unit in Silicone Valley and to Enterprise Ireland offices in the UK and Europe. * The second questionnaire was sent to 20 indigenous Irish technology companies all over the country, selling business to business. The author attempted to include both companies in the early stages of development and well established companies. The reasoning behind this was to represent problems that may be unique in certain stages of development. Both questionnaires were conducted by with follow up telephone calls. The author obtained a 75 % response rate. Prior to issue, a pilot survey of 3 individuals was carried out. The objective of this was to identify any possible misinterpretation of questions or instructions given. Samples of these 27 -

33 questionnaires are given in Appendix 1 and Appendix 2, and a list of the companies surveyed that responded is given in Appendix 3. along with the members of Enterprise Ireland surveyed. 28 -

34 CHAPTER 4 FINDINGS AND RECOMMENDATIONS

35 4.1 Introduction Having analysed and studied the responses to the questionnaires, which were answered and returned, the author was able to identify where the problems / challenges lie for software companies in the export market selling business to business. These challenges are explained in the following chapter, and were grouped under one of seven headings to give the reader a clearer idea of the. exact aspects of the business that need attention. 4.2 Problems relating to markets a) The majority of companies interviewed listed a lack of good market intelligence as one of their main problems. As stated in chapter 2, the software market is extremely volatile, with new programs and applications capable of changing the market almost overnight. For this reason, good, up to date market intelligence is vital for companies operating in this sector. It is extremely important that companies are fully, aware of market trends, product innovations and other product offerings and also that they are alerted to possible openings in the market. In this way good market intelligence will give companies a good indication as to the right Time to Market. The time to market is a very important factor for companies, explained Jennifer Condon, National Software Director, Enterprise Ireland. Companies need to be very fast and to get the product into the market at the 30 -

36 right time. There is also a need for better briefing on market structures and channels of distribution and better guidance on the selection of distributors and agents. Enterprise Ireland s incubator units are extremely valuable in helping to overcome such problems. They offer firms up to date market intelligence and provide information on the trends taking place in the markets. However, Larry. Mone, who spent 15 years in Enterprise Ireland s San Jose office working closely with the incubator units in Silicon Valley, explained that sometimes clients problems can t be remedied by the Enterprise Ireland staff. They require specialist software or technical advice. Therefore, as a suggestion to improve the incubator units service to the client companies, Enterprise Ireland could recruit technical experts capable of dealing with specialist problems and thus increasing the range of services provided. b) A small number of exporters encounter problems arising from entering too many markets at once. This diffuses the already limited management focus and financing capabilities, explained Judi Blackmur of Enterprise Ireland s London office. Most companies surveyed avoided these problems through good strategic planning in regard to market prioritisation and selection. They developed a focused business plan. Most of them tended to focus on English speaking areas. In the US however, companies have to focus on geographical areas. Enterprise Ireland helped companies focus in the US, with offices in Boston to support software companies, in Washington for telecom companies, 31 -

37 in New York for large banking and media companies and on the West Coast for high tech companies in Silicon Valley. c) Most companies experience difficulties in gaining market credibility, in foreign markets. In the US, which is the main export market for the majority of Irish software companies, the domestic companies have a major advantage due to the large size of the US market. For this reason they have much more customer contacts developed through strong networking. Irish firms on the other hand suffer from a lack of visibility. As a consequence, developing strong networks is imperative for Irish companies. One way of creating stronger networks is through hiring native sales/marketing people. In doing this a firm can use these sales peoples contacts to develop better networks. As pointed out by J. Condon, it s not what you know, it s who you know. Other methods used to develop networks are contacts already developed by. other Irish exporting companies and introductions from Enterprise Ireland, and Venture Capitalists (particularly if US funding has been secured). / To tackle the problem of a lack of visibility and a lack of customer awareness of a product, trade shows are a good way of generating interest for such products. Some companies have even gone as far as to move their CEO to the foreign market, as in the case of Performix Technologies, to achieve more visibility for their company. Also Enterprise Ireland incubator units such as those in San Jose, Boston and New York help to secure contacts in the market 32 -

38 and the promotion of their products at fairs and trade shows to increases their visibility. Some companies also mentioned closer collaboration with distributors as a solution to increase end customer contacts. d) All companies surveyed found that due to the global nature of the market a high degree of differentiation was needed. The market is extremely competitive and if no competitive advantage exists for a product, failure is imminent. They also found that due to the level of competition, pricing models had to be well thought out. To stay competitive, companies need to continually invest in research and development to create a competitive advantage over their rivals. This. competitive advantage will result in product differentiation. Most companies also found that a lot more money has to be spent on marketing in foreign. markets, especially in the US. Public Relations companies were found to be costly but valuable. As regards the pricing model, a number of firms suggested payment for software on a per use basis. Enterprise Ireland encourages innovative pricing models such as this as they offer a competitive advantage.

39 4.3 Staffing and Management Competency a). Most companies surveyed highlighted recruiting and retaining staff with the necessary skills for exporting as a major problem. This is especially true for firms exporting to Eurozone markets, which require multi-skilled staff with language skills, technical product knowledge, appropriate business skills and knowledge of the local culture. What often happens is that when new staff are recruited and trained they leave the company to pursue other career options. Due to the demand for experienced and well-trained staff in the economy, they easily secure new jobs and as a result are less loyal to their employers. Irish technology companies have limited resources when compared to MNCs, and find; it difficult to attract the top; sales/export people who demand very high wages... n. *-v ' :, Such companies have had to come up with different ways to attract and hold on to these top export managers and international sales people. A lot of companies have attracted key employees through share option offers in the company.. In this way, the employees become more motivated towards working for the firm because when the company performs well the value of their shares increases. This method worked well in Baltimore Technologies and Iona Technologies where many of their employees made large sums of money when they sold off shares after the companies went public. Other methods of attracting and retaining staff are also used. Companies provide incentives such as Creche facilities, membership of clubs and gyms, 34 -

40 support for further education or offer a company car as part of the package. Some other companies even pay V.H.I. contributions. J. Condon also pointed out that most Irish Companies are in product development and as a result more exciting developments, less bureaucracy and more varied experience attract employees.. She highlighted the need for firms to emphasise these points when recruiting. b) In some cases owner managers could not manage export sales and manufacturing properly, or they found it hard to balance the need to expand globally with the need to manage their core research and development centres. Also, in other companies there wasn t a proper balance in the management team. Different ways of overcoming this problem were suggested by the companies surveyed. The most obvious remedy is to appoint an export manager whose responsibility is to co-ordinate all the different functions of exporting, or to have someone responsible for the export market with a presence there. It is important that the management team has the right blend of skills to achieve a good balance, and if these skills don t exist within the company they need to be hired. If the resources are not available within the company to hire in extra skill sets the responsibilities of exporting need to be divided between members of the existing team. Some companies have set up research and development operations in their export markets in order to stay close to the customers and other companies have even relocated their CEO to the principal export market. 35 -

41 Enterprise Ireland encourages companies to have a non-executive director, with a particular expertise on their Boards of Management. Bringing in somebody young and dynamic with new ideas and enthusiasm, combined with specific expertise, from outside the firm can do this. It was also suggested that organisations like Enterprise Ireland could assist by subsidising the cost of export managers, to be hired for one or two years until the company has the resources to fund the additional overhead. Other organisations could also help by offering consultancy services or training through language programs, to help with practical competency and team building in strategic management and international marketing r ' i \ 4.4 Financial Aspects a) All companies surveyed had problems in raising finance. A lack of adequate financing limits sales and marketing opportunities and the ability to rapidly exploit market opportunities. In the export markets, especially in the U.S., partners with greater resources fund domestic companies from an earlier stage. This leaves the Irish companies at a disadvantage financially when trying to compete. Many of these companies sought financial guidance but found it difficult to identify a suitable source. \ Finance has become less of an issue now for software companies. There is an increasing amount of Venture Capital firms in Ireland who are willing to finance promising new Irish software companies and to respond to early stage 36 -

42 funding needs. Enterprise Ireland has stakes in some of these Venture Capital firms through European funding specially provided to prime the venture Capital industry in Ireland. However, in recent months, there is increasing evidence that the venture capital industry in Ireland is adopting a more selective approach towards new investments, because of the current volatility in the high technology sector. There is also substantial money available from BES (Business / Expansion Scheme) funds. The government created the BES funds as a vehicle to encourage the financing of expanding companies. Groups of individuals invest money into promising new and expanding Irish companies for a specified length of time to receive tax relief from the government. This is organized generally with the aid of accountants and financial advisers. After the time period has elapsed the investors hope to get their money back from the company tax-free, and in some cases with agreed up front capital gains. Another source of financing for new companies comes through serial investors, explained J. Condon. This phenomenon occurs when people who made their money in the past through other software companies re-invest in new, promising companies. Examples of such serial investors include: Pat McDonagh (River Deep, Smart Force) Bill McCabe (Smart Force, Parthus) Eddie Kerr (Conduit, Bronway) Mike Peirce (Parthus, Mentec) 37 -

43 Other serial investors in technology companies who have not generated wealth through investments in the software industry include: Dermot Desmond (Stockbroking and currency dealing) Denis O Brien (Telecommunications) Neil McHugh ( Prepared consumer foods) In addition to investing much needed capital in fledgling /. emerging Irish software companies, serial investors such as those listed, generate confidence amongst other potential investors. Other suggestions to help companies overcome financial problems included subsidisied interest rates, tax incentives and advice on book keeping. < '. b) Under-estimating the costs involved in entering the market caused problems for most companies surveyed. The costs of marketing and promotion were found to be much greater in the export markets, especially in the US. Also underestimated were travel costs to and from the market and people costs of recruiting and maintaining staff in export markets. These problems can be solved through better financial planning and more intensive market research. Also Enterprise Ireland s incubator units help to minimise the initial costs of market entry by supplying ready to use offices and through readily available market intelligence and marketing assistance. 38 -

44 4.5 Current downturn in the US market At present in the U.S. there is a major slowdown in the technology sector. Most of the major software and computer companies like Dell and Compaq have fallen short of their first quarter (Ql) profit predictions and their stock values have decreased. As a result share values have fallen considerably and there is less confidence among investors in the technology sector. Judi Blackmur suggested that, the downfall is a reflection on stock market over valuations". Also, internationally, many promising new e-commerce companies, particularly those selling business to customer, who secured major, funding on, foot of their potential have failed dismally to meet expectations and there has been numerous high profile closures. This has eroded potential investors confidence in the high technology sector and has reduced the possibility of future funding. However many of the companies selling business to business continue to perform well, although many have seen their stock market valuations fall in line with the overall valuations in technology stocks. Many of the large U.S software and computer multinationals have operations in Ireland employing significant numbers of people. There is now a major concern that because of the slow, down in the U.S market, jobs are going to be lost in these multinationals in Ireland. For example, Intel has announced the cull of 6,000 jobs world wide through natural attrition and has halted the 39 -