- Email: [email protected]
Electronic trade and internationalization
lnteffiational Journal of lnformarion Management (1990), 10 (182-l 91)
Electronic Trade and Internationalization J. KUULA
In our research, we examine the current state of internationalization in Finnish industries. As a consequence of structural changes in the world market and political changes in the European market, we see that there is a change going on within these industries. Firstly the industries have difficulties because of changed balances in worldwide competition. Secondly, the private companies within these industries have to compete more, whereas their means of competition have to be checked. The primary means of competition exist at the industrial level and in the national trading policies, but in our studies, we concentrate on individual organizations’ possibilities to promote competition. In particular, we examine information systems as a means of competition and as a promoter for internationalization. In this paper, we view the problem through an individual trading effort, which begins with strategic management activities and ends with deliveries or with a continuous customer relationship. From this point of view, promoting competition means gaining new customers or new or renewed orders from old customers, which in our concern could be assisted by different kinds of information systems. The main types of promoting system are the information service systems, communication systems and data interchange systems. These have their specific roles in different phases of the trading process, but together they make a series of electronically supported activities, which we call electronic trade.
Jaana Kuula is with the Department of Computer Science, University of JyvlskyII, SF-40100 JyvPskyll, Finland.
‘LEONTIADES, J.C. (1985). Multinational corporate strategy: Planning for world markets. Lexington Books. ‘Completing the internal market, White Paper from the Commission to the European Council, Commission of the European Communities, June 1985.
182
Introduction Internationalization is a phenomenon, that concerns more companies now than ever before. The primary explanation for this is the heavy reconstruction and economic boom in Western Europe, America and Japan after World War II. This period of peace and struggle has created forces that drive companies to internationalize. Leontiadesi has named three kinds of force: the vast development in the means of transportation, the even more marked development in communications, and the structural changes in the world economy. The changes in the world economy reflect the fact that Western Europe and North America cannot master the world market alone, as they have nearly done before. Numerous new competitors have arisen from totally new countries, which adds to competition all over the world. Developments in the means of transportation and communication accelerate internationalization and competition, as geography and time do not cause such restrictions for trade as in earlier times. In addition to these physical and technical matters, there is a psychological side to world economy which has accelerated internationalization. In particular small countries in Western Europe have become worried about the competitiveness of their industries, and have become interested in economic cooperation and combined resources. The objective of this development, called European integration, is to create a vital internal market in Europe, where there would be no technical barriers against free movement of goods, services, labour or capital. The leading principles for realizing these objectives were defined in a White Paper in 1985.*
0268-4012/90/03
0182-l 0 $03.00 0
1990 Buttetwotth-Heinemann
Ltd
J. KUULA
‘Ibid. 40p. cit., Ref.
1.
R. (1978). Suomalaisten yritysten kansainviilisistd toimintavaihtoehdoista (About the international operation types of Finnish companies). VientikoulutussZtii, FIBO-series, 14:9. LEONTIADES, op. cit., Ref. 1. 5LUOSTARINEN,
In Europe, integration of markets evidently improves the common competitiveness of these countries, but the industrial balance inside this area will be reallocated. For example such traditional industries as forestry and heavy metal industry will be affected by the new legislation, so that by the end of the 1990s there probably will be a new composition of competition in these industries.3 If the leading paper industry countries in Scandinavia cannot negotiate proper conditions for their trade with EC countries, production and ownership will be shifted to EC countries. The same development applies also to the metal industry. Another point is, if Scandinavian and other EFTA countries manage to negotiate proper trading policies with the EC, or if these countries succeed in moving capital and management to the EC area, the borders will be tightened for outsiders. For other than multinational companies the most dramatic consequence of the growing internationalization is that there will no more be the shelter of home markets. This means that even those companies that do not want to expand across national borders will have to create strategies against pressures coming from new competitors. As Leontiades has noted,4 this concerns not only the American market, but also all national markets in Europe, no matter if the country is an EC member or not. Countries like Japan and USA have applied protectionist means in this kind of situation, but this method cannot be applied in all cases any more. Inside Europe such barriers will be removed by legislation by the end of the 199Os, but what will happen between Europe, the USA, Japan and other corresponding markets is not yet quite clear. Current European integration includes the tightening of external borders, but this cannot concern all trade because in some branches protectionism is needed, whereas in others it should not be allowed at all. On the other hand, hardly any part of the world is self sufficient, and there are in any case worldwide concerns that require cooperation to protect living conditions on earth. As the above-mentioned trends show, trade is becoming ever more international, and in many cases fully global. In this kind of environment companies have to find means to counter geographical distances and time zones. The first move is to organize corporate activities according to international competitive strategies. Thereafter, the primary strategies may be fulfilled by suitable international operations, as in the case of brewing companies, establishing a holding company, building new manufacturing facilities, selecting direct export, agents etc., as Leontiades and Luostarinen have described.5 This course of action reduces the need to transfer goods and other material; however, the need for communication remains and even increases. In addition to increased communication inside the internationalized corporations, the companies must also communicate with several other partners around the world. In this environment, travelling and traditional document exchange on papers does not fulfil the requirements of fast decision making and deliveries. Therefore, electronic means have to be applied to all imaginable phases of any international trading process, only if it is theoretically possible and economically reasonable. We examine the trading process as a series of successive activities, which present the different phases of one trading effort. The objective of this trading process is both intermediate contracting, and also long-term custom& relations. Information systems may help achieve these objectives, and in that sense these systems would be promoters for internationalization.
183
Elecrronic
trade
and internationalization
Changes in world market and development trends would also encourage the development of these systems as is clarified in the section on pressures for electronic trade.
The concept of electronic trade
6MALONE, K.I.
(1987).
T.W.,
YATES,
J. AND
BENJAMIN,
Electronic markets and electronic hierarchies, Communications of fhe ACM, 30, (No. 6), pp. 484-497. ‘Ibid.
As Malone et al. have described,6 market structures have developed in the course of time, so that the next phase is electronic markets. These markets may develop either from a nonelectronic market, or from an electronic hierarchy spanning organizational boundaries. The initiator for electronic markets may be a manufacturer, distributor, information technology/network provider, financial service or a buyer, and all these organizations may also be participants in these markets as presented in Figure 1 .7 In Malone’s concept of electronic market the old trading activities of the physical market have been replaced by electronic messages that carry out the same functions, for example making sales proposals and offers, or negotiating for products, prices and deliveries. The type of market may vary depending on the product to be sold. For example, standard products that can be described simply and easily in the information systems set different demands on the electronic trading facilities, than very complex products, currencies, stocks or information. Electronic markets are sometimes segmented according to products; for example, there are such special electronic markets as currency, stock, raw material and information markets. The electronic market is, however, only one part of electronic trade. If we look at the whole long-term process of trading, we can see it as a series of sequential phases aiming at the same goal. These phases may be assisted electronically or partially replaced by electronic operations,
DistributorTelemarketing \
Information technologyNetwork provider
Financial Electronic transfer
servicesfunds BuyerProcurement database
ManufacturerElectronic sales force Electronic markets
Biased
: Unbiased
: Personalized
L
Figure 1. Evolution of electronic markets: multiple starting points lead to a common evolutionary path
184
J. Kuuln
which gives us reason to call this long process electronic trade. This idea is outlined in Figure 2. As illustrated in Figure 2, trading (seen as a long-term process) does not start from those activities between sales forces and buyers, that Malone has mentioned to operate on the electronic market. Instead, individual trading starts from the earliest intentions to increase sales or to secure existing customer relations. In Figure 2 we have named this phase strategic management. It is often hard to see its connection to practical operations and buying and selling, but this phase precedes every action of contracting, buying and selling. Usually one execution of the strategic management phase precedes several independent contracting activities and other later phase activities. In the early phases decisions are made and other tasks undertaken at a more general level, whereas in the later phases negotiations concern details of practical operations like financing, insurance, prices, discounts, amounts, delivery schedules, transportation, etc. If we now place the concept of electronic market into the trading process described in Figure 2, this concept covers only some activities in the later phases of trading. As already indicated, the early phases are also an essential part of trading, and therefore the concept of electronic trade should mean the whole process. This concept of electronic trade is justified for the reason that the early phases of trading may be also based on electronic means, just as the later phases are based on the electronic market. The electronic means in the early trade phases mostly concern for example information services, electronic mail or teleconferencing. There are numerous variations, but if we classify them, they would mostly be information service systems and communications systems. These may be built on public or commercial infrastructures or networks, and the systems could be public by having a large number of user organizations for the same services. We call this feature of systems the openness of systems, which may be characterized by the tightness of the system connection. The systems, which newly interested organizations can easily join, are very open to new members. At the same time their system connection to these organizations is often very loose,
\
J
L
Early phases of trading and loose system connections
Figure 2. The long-term
t
I
Late phases of trading and tight system connections
view of a trading process
185
Electronic trade and internationalization
because each organization can quite freely decide whether to use the system or not. This feature is essential, especially when the organizations have already started using the system. The opposite of the loose system connection is the tight system connection. It develops between organizations, which build systems for a restricted number of user organizations, and which have a relatively high proportion of their own applications as a basis for these systems. This kind of system is usually called an interorganizational system (IOS),s but even the electronic market could have this kind of system connection, if it had a restricted number of user organizations, and if some of these organizations could gain great advantage by establishing it. The systems that create tight system connections between organizations are being used mostly in the later phases of trading, often after first having long-standing customer relations. Tight system connections can be applied also to new business relations where their competitive power is more efficient, as they entice new organizations to work with the organization that establishes the system. This is however a conditional way of procedure, because the success of establishing this kind of external system does not depend only on the host organization’s actions. Much depends on right timing, general knowledge and attitudes, as well as the other systems in the market .9
Pressures for electronic trade
‘CASH, J.I., JT and KONSYNSKI, B.R. (1985). IS redraws competitive boundaries. Harvard Business Review, March-April, 9HIRSCHHEIM, R. (1988). Using information technology for competitive advantage, Templeton College, Oxford. “Op. cit., Ref. 1. “Op. cit., Ref. 2. ‘ZCommunication by the Commission: Towards a dynamic European economy, Green Paper on the development of the common market for telecommunications services and equipment, Commission of the European Communities, June 1987. ‘31bid.
186
As described in the introduction, the competition in the world market has increased and is increasing all the time. This is partly due to new competitors arising from countries other than the earlier market leaders like America, Western Europe and Japan. lo The increased competition applies pressure on the old means of competition for the earlier market holders as the number of competitors is greater, and the new competitors may apply means that the others do not have. For example, such countries as Korea, Taiwan and Singapore may gain advantage from lower labour costs, improved work motivation and cheap new technology, which can be installed quickly without having the burden of old technology and industrial heritage. In addition to this changing balance in the world market, there are area1 development trends, which affect competition in certain areas. In Scandinavia and other West European countries this kind of market force is the European integration, which aims at the creation of a powerful internal market in Europe. l1 The plan for creating this internal market also includes a plan for creating the common market for telecommunications services and equipment.‘* This development into electronic trade at a corporate level is partly because of competitive forces that lie behind the creation of the European common market. The detailed reasons however are, for example: 1. 2. 3. 4.
The speed of technological diversification (signal digitization, optical cables, computer networks, cellular telephony, satellites, etc.). The expanding range of new forms of access to sources of information. The explosive growth in telecommunications requirements. The major importance of scale effects through multinational participants.13
The influence
mechanism
for shifting
into electronic
trade
seems to be
J. KVULA
Technological development on information transfer and access (41
I Arising
force
(7)
+ Creation of common market for telecommunications services (5)
I
Shift into electronic trade in the public sector and private corporations (8)
-
I
t
Increasing
information requirements
and
Natural
need
(6)
telecommunications
in business
(31
Creation of European common market (2)
Increasing
competition in the
world
and
changing
market
balance
(1)
Figure 3. Pressures for shifting into electronic trade in Scandinavian other European countries
140p. cit., Refs 2 and 8. “Op. cit., Ref. 1. 16KOIVVMAA,
K. AND
WARONEN,
EY-EFTA 1992 - Euroopan (EY-EFTA 1992 European s ace). Business Books. P * Op. cit., Ref. 12. “Op. cit., Refs 1 and 9. 190p. cit., Ref. 16.
E. (1988). talousalue economic
and
exclusively circulative (see Figure 3): the creation of a common market for telecommunications services is explained by development trends in business, industrial life and home economies,14 but at the same time this creation effort forces companies and other organizations to join the planned development. l5 If the shift to electronic trade would be guided by free market forces or other central organization-led reguonly,i6 without any government lation, the shift into electronic trade would probably be slower. Also the initiators for establishing trading networks would probably be different, as industries would be the main designers instead of public institutions like EFTA and EC working groups. As Figure 3 shows, the decision to shift into electronic trade depends no more on free market forces or free will in corporate management. Instead, the development is accelerated by centralized planning, which at first prioritizes the companies in EC countries ahead of all others,” and then forces them to turn into electronic trade by creating the facilities and common market for it.t8 Countries, in practice private companies, outside the EC are affected by the same planning and same common markets, as their economies are dependent on trade with EC countries, and because electronic trade usually involves both trading partners. Expressed in quantitative figures, economic dependency means that the EC is the most important trading partner for Scandinavian (and other EFTA) countries. In 1986 exports from the EC to EFTA were 25.5 per cent of all trade, and imports 23.1 per cent. In Finland alone, exports to the EC were 42.2 per cent in 1987, and imports 44.4 per cent.” The other forms of dependency are the
187
Electronic
trade and internationalization
electronic trading facilities, which will work only if both trading partners have the same facilities. Therefore full adoption of electronic trade in the EC area would also involve the most important trading partners if the EC countries decided not to use the old communication and data interchange practices after establishing the new trading systems. To analyse the shift into electronic trade, we can examine the effects of the changes in the world market. These effects encourage further companies to use electronic means in their trade. Examples are: 1. 2. 3.
The increase and geographical spread of closely partners and other interested organizations. The impact on production costs. The impact on contracting and deliveries.
bound
trading
The increase and geographical spread of trading partners As mentioned earlier, the changing balance in the world market causes a quantitative growth of competitors, other interested organizations and relevant activities for an individual company or corporation. The location of these interest groups may differ from those which the company is used to, as these groups may operate on a geographically widespread area. For an individual company this means increased information requirements. In addition, this information has to be gathered from a very large area, processed centrally and delivered maybe to a global organization. As explained by the themes used in Figure 2, the increase in the number and geographical spread of competitors and other interest groups encourages application of electronic trading facilities in the early phases of trading. As a consequence of the described changes, the forms of electronic trade in this phase would comprise the use of information service systems for preparing corporate/ company level negotiations and strategic operations. This same external cause implies the use of electronic communication systems both inside the corporation, and between the corporation and its external interest organizations. The reason for the use of electronic means instead of manual means, phone calls or face-to-face negotiations in this context is the large number of relationships to be managed, and the problems that the timezones cause in global communications. Electronic means do not, however, remove all personal negotiations or written documentation, but their role will be made more important by the increase of global business relations. The impact on production costs
"PORTER, M.E. (1984). Strategia kilpailutilanteessa: Toimialojen ja kilpailijoiden analysointitekniikat (Competitive strategy: Techniques for analysing industries and competitors). Oy Rastor Ab.
188
In Finland, the industrial basis of the economy rests heavily on the paper and metal industry. Both represent the mature or regressive branches in Porter’s classification’s and have already met great difficulties in international markets. For example, Korea and Yugoslavia produce ships at lower costs than Finnish shipyards, and the strengthening of European cooperation threatens the whole metal industry by way of production inside the common market. The paper and paper product industry has similar difficulties, as the EC may replace imports from Scandinavian countries by its own production and substitute raw materials. In general, all such industries in Scandinavia that have high labour costs, and/or that may easily be replaced by production in other countries, are threatened by production in the EC and newly industrialized low cost countries. If the quality of products is about the same,
J. KUULA
Scandinavian industries have to find new ways to compete. In the EC market, political relations between EFTA and EC may help trading, but in other markets this does not help much. Furthermore if we leave such means of competition as product differentiation out of consideration in this context, companies have no other possibility than to lower their costs, produce outside Scandinavia or tie their customers, suppliers and maybe other partners to their business somehow, for example, by information systems. The idea of tying is that organizations would trade with each other, even if someone else would offer the same products more cheaply. The above arguments favour building information systems in the lute phases of trading described in Figure 2. These systems, that again are one form of electronic trade, represent mostly the interorganizational which typically result in lowered costs and long-standing systems,‘l relations between trading partners. The international applications of these are few in typical Scandinavian industries, but the national applications may have an effect on international trade as well, if the advantages are marked. The problem in the Finnish metal and paper industry in this context is that the production phases that have been located in Finland are highly automated already, so that new systems relations between suppliers and producers would not improve production much. The improvement created by interorganizational systems (10s) could therefore be achieved by applications built between production and phases coming logically after that. In the paper industry, for example, this would mean systems built between production/marketing organizations and mass users of pulp, paper or paper products. The direct systems connection could also be replaced by electronic market applications, such as those that Malone has talked about.** In practice, it would be a question of several IOSs, so that the host organizations of the systems would be producers in Finland (or in other Scandinavian countries) and maybe subsidaries in other countries, and user organizations would be buyers, business partners, sales organizations or similar all over the world. The impact on contracting
“Op.
cit., Ref. 8.
220p. cit., Ref. 6. 230p. cit., Ref. 2. 240p. cit., Ref. 12.
and deliveries
International trade requires many kinds of trading documents because of various payment practices, currency management, insurances, customs clarifications, etc. These practices increase trading costs in almost all international trade and slow down deliveries. In Europe, the EC countries have decided to remove these technical barriers of internaexchange into electronic tional trade,23 and turn the needed document companies, these decisions will mean reduced form.24 For individual transportation costs, faster deliveries and faster negotiations in the contracting and delivery phase as a result of electronic document interchange. The electronic trading facilities would therefore concern mostly the very late phases of trading, and, as described in Figure 3, these electronic means would be both a natural consequence of changes in business, and a gradually rising force due to centrally managed planning and establishment of international infrastructures. The companies do need the electronic document interchange and even real-time transportation follow up, but they can choose whether to build own applications for it, or whether to use ready built standard systems. In the European area, the ready built systems cannot be ignored, so even companies outside the common market have to join it. On the other
189
Electronic trade and internationalization
hand, individual systems might offer additional when trading outside the regionally standardized
advantages, systems.
at least
Conclusions The paper described how the competition in the world market is changing, and how the EC countries respond to this competition by creating a European common market for trade, and a special common market for telecommunications services and equipment. The changes in international competition affect communications and information activities in individual companies, which we analysed phase by phase by studying the effects on a single trading process. Also area1 developments in Europe, the creation of a common market and the market for telecommunications services forces additional communications and information activities on companies, so that the companies are led to adopt such electronic means of trading, which are here called electronic trade. The whole concept of electronic trade consists of communications systems, information service systems and data interchange systems, which have their specific roles in different phases of trading. In the early phases of trading, which include strategic planning and management, as well as many other negotiations, the most important forms of electronic trade are various information service and communications systems. These are so called open systems, which do not tie the user organizations as users. In the later phases of trading, system connections become tighter, and tie customers, suppliers, partners and similar bodies as long-standing users of the systems. These forms of electronic trade, which will be used mostly in the late phases of trading, include interorganizational systems, electronic data interchange systems and electronic market systems. The external pressures that affect the shift to electronic trade increase the information requirements in the strategic management phase, and encourage the building or improvement in information service systems and communications systems in the early phases of trading. In later phases, competition, cost pressures and increasing cooperation between EC countries in Europe force companies to make stable customer relations in other ways. For this purpose, various interorganizational systems are a logical answer, and a suitable form of electronic trade. In the even later phases, in the contracting phase and during deliveries and transportation, the speed of sales negotiations and deliveries, as well as the punctuality of transportation are the relevant factors in competition. This influences information activities so that electronic market systems, electronic document interchange systems and transportation will be adopted. These systems may be built by companies, who use them, or by public or commercial service providers. In the European area, EC countries will build common information service facilities for their trade, which at the same time forces companies to adopt them. As important trading partners, this also concerns countries outside the EC, especially Scandinavian and other EFTA countries. It is too early to say whether electronic trade could promote internationalization at a company level. The views presented here are merely those necessary to maintain market position. If such aspects as legal hindrances or high duties against trading in the European common market or some other important trading area are not applied to countries like Finland, Sweden or Norway, electronic trade might 190
J. KUULA
25Foreign Trade, Monthly survey 3, Statistical Bureau of the Board of Customs, Finland, 1988. “Statistical yearbook of Finland 1987, Central Statistical Office of Finland, 1987. 271bid. “Op. cit., Ref. 25.
promote internationalization in the long term. This, however, concerns mainly Scandinavian countries whose internationalization process has followed quite a similar form since the 1960s and has been based mostly on the paper and metal product industries. As the internationalization process in these industries has advanced to the point where the companies have already created a worldwide network of manufacturing and sales units, the shift into worldwide information networks and electronic trading systems has become a reality. After establishing electronic systems, volumes of sales might increase, and even new customers might be attracted to order regularly. This would be one practical form of promoting internationalization, and the other, moving into totally new market areas, might follow after that, if no technical restrictions prevent it. The use of tight interorganizational systems is to better those industries, which have long life expectancies. The two major Scandinavian industries, paper and metal industries, are Porter’s named regressive branches, which does not encourage one to expect much increase in revenues in these branches. However, statistics do not yet show a decline in the use of paper and paper products, which encourages one to continue investing in the paper industry. For example, the paper and graphics industry has increased its sales by 29 per cent from March 1987 to March 1988, and by 9 per cent during January to March 1988.25 During the five-year period from 1980 to 1985, the paper industry has kept or slightly increased its sales level, so that only sales of pulp have decreased somewhat.26 The situation in the metal industry is not so optimistic as sales figures slightly declined in [email protected] From March 1987 to March 1988, sales of metal products and machine industry dropped by 22 per cent. 2x The immediate reason is, however, not the changes in the world market or in the European economy, as the metal industry in Finland has been strongly dependent on bilateral trade with SEV countries. When these sales are falling, they cannot easily be replaced by sales to other countries, which shows as a depression in the statistics. Obviously the metal sector will be reorganized in Finland as a consequence of decreased sales, but those companies that will survive, may need and use the means of electronic trade discussed earlier in this paper. The internationalization history in the metal industry is much like that in the paper industry, and knowhow and quality of work are traditionally high. That means, that not all of the metal industry will die in Finland, and those that continue will probably be stronger than ever.
191
Electronic Trade and Internationalization J. KUULA
In our research, we examine the current state of internationalization in Finnish industries. As a consequence of structural changes in the world market and political changes in the European market, we see that there is a change going on within these industries. Firstly the industries have difficulties because of changed balances in worldwide competition. Secondly, the private companies within these industries have to compete more, whereas their means of competition have to be checked. The primary means of competition exist at the industrial level and in the national trading policies, but in our studies, we concentrate on individual organizations’ possibilities to promote competition. In particular, we examine information systems as a means of competition and as a promoter for internationalization. In this paper, we view the problem through an individual trading effort, which begins with strategic management activities and ends with deliveries or with a continuous customer relationship. From this point of view, promoting competition means gaining new customers or new or renewed orders from old customers, which in our concern could be assisted by different kinds of information systems. The main types of promoting system are the information service systems, communication systems and data interchange systems. These have their specific roles in different phases of the trading process, but together they make a series of electronically supported activities, which we call electronic trade.
Jaana Kuula is with the Department of Computer Science, University of JyvlskyII, SF-40100 JyvPskyll, Finland.
‘LEONTIADES, J.C. (1985). Multinational corporate strategy: Planning for world markets. Lexington Books. ‘Completing the internal market, White Paper from the Commission to the European Council, Commission of the European Communities, June 1985.
182
Introduction Internationalization is a phenomenon, that concerns more companies now than ever before. The primary explanation for this is the heavy reconstruction and economic boom in Western Europe, America and Japan after World War II. This period of peace and struggle has created forces that drive companies to internationalize. Leontiadesi has named three kinds of force: the vast development in the means of transportation, the even more marked development in communications, and the structural changes in the world economy. The changes in the world economy reflect the fact that Western Europe and North America cannot master the world market alone, as they have nearly done before. Numerous new competitors have arisen from totally new countries, which adds to competition all over the world. Developments in the means of transportation and communication accelerate internationalization and competition, as geography and time do not cause such restrictions for trade as in earlier times. In addition to these physical and technical matters, there is a psychological side to world economy which has accelerated internationalization. In particular small countries in Western Europe have become worried about the competitiveness of their industries, and have become interested in economic cooperation and combined resources. The objective of this development, called European integration, is to create a vital internal market in Europe, where there would be no technical barriers against free movement of goods, services, labour or capital. The leading principles for realizing these objectives were defined in a White Paper in 1985.*
0268-4012/90/03
0182-l 0 $03.00 0
1990 Buttetwotth-Heinemann
Ltd
J. KUULA
‘Ibid. 40p. cit., Ref.
1.
R. (1978). Suomalaisten yritysten kansainviilisistd toimintavaihtoehdoista (About the international operation types of Finnish companies). VientikoulutussZtii, FIBO-series, 14:9. LEONTIADES, op. cit., Ref. 1. 5LUOSTARINEN,
In Europe, integration of markets evidently improves the common competitiveness of these countries, but the industrial balance inside this area will be reallocated. For example such traditional industries as forestry and heavy metal industry will be affected by the new legislation, so that by the end of the 1990s there probably will be a new composition of competition in these industries.3 If the leading paper industry countries in Scandinavia cannot negotiate proper conditions for their trade with EC countries, production and ownership will be shifted to EC countries. The same development applies also to the metal industry. Another point is, if Scandinavian and other EFTA countries manage to negotiate proper trading policies with the EC, or if these countries succeed in moving capital and management to the EC area, the borders will be tightened for outsiders. For other than multinational companies the most dramatic consequence of the growing internationalization is that there will no more be the shelter of home markets. This means that even those companies that do not want to expand across national borders will have to create strategies against pressures coming from new competitors. As Leontiades has noted,4 this concerns not only the American market, but also all national markets in Europe, no matter if the country is an EC member or not. Countries like Japan and USA have applied protectionist means in this kind of situation, but this method cannot be applied in all cases any more. Inside Europe such barriers will be removed by legislation by the end of the 199Os, but what will happen between Europe, the USA, Japan and other corresponding markets is not yet quite clear. Current European integration includes the tightening of external borders, but this cannot concern all trade because in some branches protectionism is needed, whereas in others it should not be allowed at all. On the other hand, hardly any part of the world is self sufficient, and there are in any case worldwide concerns that require cooperation to protect living conditions on earth. As the above-mentioned trends show, trade is becoming ever more international, and in many cases fully global. In this kind of environment companies have to find means to counter geographical distances and time zones. The first move is to organize corporate activities according to international competitive strategies. Thereafter, the primary strategies may be fulfilled by suitable international operations, as in the case of brewing companies, establishing a holding company, building new manufacturing facilities, selecting direct export, agents etc., as Leontiades and Luostarinen have described.5 This course of action reduces the need to transfer goods and other material; however, the need for communication remains and even increases. In addition to increased communication inside the internationalized corporations, the companies must also communicate with several other partners around the world. In this environment, travelling and traditional document exchange on papers does not fulfil the requirements of fast decision making and deliveries. Therefore, electronic means have to be applied to all imaginable phases of any international trading process, only if it is theoretically possible and economically reasonable. We examine the trading process as a series of successive activities, which present the different phases of one trading effort. The objective of this trading process is both intermediate contracting, and also long-term custom& relations. Information systems may help achieve these objectives, and in that sense these systems would be promoters for internationalization.
183
Elecrronic
trade
and internationalization
Changes in world market and development trends would also encourage the development of these systems as is clarified in the section on pressures for electronic trade.
The concept of electronic trade
6MALONE, K.I.
(1987).
T.W.,
YATES,
J. AND
BENJAMIN,
Electronic markets and electronic hierarchies, Communications of fhe ACM, 30, (No. 6), pp. 484-497. ‘Ibid.
As Malone et al. have described,6 market structures have developed in the course of time, so that the next phase is electronic markets. These markets may develop either from a nonelectronic market, or from an electronic hierarchy spanning organizational boundaries. The initiator for electronic markets may be a manufacturer, distributor, information technology/network provider, financial service or a buyer, and all these organizations may also be participants in these markets as presented in Figure 1 .7 In Malone’s concept of electronic market the old trading activities of the physical market have been replaced by electronic messages that carry out the same functions, for example making sales proposals and offers, or negotiating for products, prices and deliveries. The type of market may vary depending on the product to be sold. For example, standard products that can be described simply and easily in the information systems set different demands on the electronic trading facilities, than very complex products, currencies, stocks or information. Electronic markets are sometimes segmented according to products; for example, there are such special electronic markets as currency, stock, raw material and information markets. The electronic market is, however, only one part of electronic trade. If we look at the whole long-term process of trading, we can see it as a series of sequential phases aiming at the same goal. These phases may be assisted electronically or partially replaced by electronic operations,
DistributorTelemarketing \
Information technologyNetwork provider
Financial Electronic transfer
servicesfunds BuyerProcurement database
ManufacturerElectronic sales force Electronic markets
Biased
: Unbiased
: Personalized
L
Figure 1. Evolution of electronic markets: multiple starting points lead to a common evolutionary path
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J. Kuuln
which gives us reason to call this long process electronic trade. This idea is outlined in Figure 2. As illustrated in Figure 2, trading (seen as a long-term process) does not start from those activities between sales forces and buyers, that Malone has mentioned to operate on the electronic market. Instead, individual trading starts from the earliest intentions to increase sales or to secure existing customer relations. In Figure 2 we have named this phase strategic management. It is often hard to see its connection to practical operations and buying and selling, but this phase precedes every action of contracting, buying and selling. Usually one execution of the strategic management phase precedes several independent contracting activities and other later phase activities. In the early phases decisions are made and other tasks undertaken at a more general level, whereas in the later phases negotiations concern details of practical operations like financing, insurance, prices, discounts, amounts, delivery schedules, transportation, etc. If we now place the concept of electronic market into the trading process described in Figure 2, this concept covers only some activities in the later phases of trading. As already indicated, the early phases are also an essential part of trading, and therefore the concept of electronic trade should mean the whole process. This concept of electronic trade is justified for the reason that the early phases of trading may be also based on electronic means, just as the later phases are based on the electronic market. The electronic means in the early trade phases mostly concern for example information services, electronic mail or teleconferencing. There are numerous variations, but if we classify them, they would mostly be information service systems and communications systems. These may be built on public or commercial infrastructures or networks, and the systems could be public by having a large number of user organizations for the same services. We call this feature of systems the openness of systems, which may be characterized by the tightness of the system connection. The systems, which newly interested organizations can easily join, are very open to new members. At the same time their system connection to these organizations is often very loose,
\
J
L
Early phases of trading and loose system connections
Figure 2. The long-term
t
I
Late phases of trading and tight system connections
view of a trading process
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Electronic trade and internationalization
because each organization can quite freely decide whether to use the system or not. This feature is essential, especially when the organizations have already started using the system. The opposite of the loose system connection is the tight system connection. It develops between organizations, which build systems for a restricted number of user organizations, and which have a relatively high proportion of their own applications as a basis for these systems. This kind of system is usually called an interorganizational system (IOS),s but even the electronic market could have this kind of system connection, if it had a restricted number of user organizations, and if some of these organizations could gain great advantage by establishing it. The systems that create tight system connections between organizations are being used mostly in the later phases of trading, often after first having long-standing customer relations. Tight system connections can be applied also to new business relations where their competitive power is more efficient, as they entice new organizations to work with the organization that establishes the system. This is however a conditional way of procedure, because the success of establishing this kind of external system does not depend only on the host organization’s actions. Much depends on right timing, general knowledge and attitudes, as well as the other systems in the market .9
Pressures for electronic trade
‘CASH, J.I., JT and KONSYNSKI, B.R. (1985). IS redraws competitive boundaries. Harvard Business Review, March-April, 9HIRSCHHEIM, R. (1988). Using information technology for competitive advantage, Templeton College, Oxford. “Op. cit., Ref. 1. “Op. cit., Ref. 2. ‘ZCommunication by the Commission: Towards a dynamic European economy, Green Paper on the development of the common market for telecommunications services and equipment, Commission of the European Communities, June 1987. ‘31bid.
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As described in the introduction, the competition in the world market has increased and is increasing all the time. This is partly due to new competitors arising from countries other than the earlier market leaders like America, Western Europe and Japan. lo The increased competition applies pressure on the old means of competition for the earlier market holders as the number of competitors is greater, and the new competitors may apply means that the others do not have. For example, such countries as Korea, Taiwan and Singapore may gain advantage from lower labour costs, improved work motivation and cheap new technology, which can be installed quickly without having the burden of old technology and industrial heritage. In addition to this changing balance in the world market, there are area1 development trends, which affect competition in certain areas. In Scandinavia and other West European countries this kind of market force is the European integration, which aims at the creation of a powerful internal market in Europe. l1 The plan for creating this internal market also includes a plan for creating the common market for telecommunications services and equipment.‘* This development into electronic trade at a corporate level is partly because of competitive forces that lie behind the creation of the European common market. The detailed reasons however are, for example: 1. 2. 3. 4.
The speed of technological diversification (signal digitization, optical cables, computer networks, cellular telephony, satellites, etc.). The expanding range of new forms of access to sources of information. The explosive growth in telecommunications requirements. The major importance of scale effects through multinational participants.13
The influence
mechanism
for shifting
into electronic
trade
seems to be
J. KVULA
Technological development on information transfer and access (41
I Arising
force
(7)
+ Creation of common market for telecommunications services (5)
I
Shift into electronic trade in the public sector and private corporations (8)
-
I
t
Increasing
information requirements
and
Natural
need
(6)
telecommunications
in business
(31
Creation of European common market (2)
Increasing
competition in the
world
and
changing
market
balance
(1)
Figure 3. Pressures for shifting into electronic trade in Scandinavian other European countries
140p. cit., Refs 2 and 8. “Op. cit., Ref. 1. 16KOIVVMAA,
K. AND
WARONEN,
EY-EFTA 1992 - Euroopan (EY-EFTA 1992 European s ace). Business Books. P * Op. cit., Ref. 12. “Op. cit., Refs 1 and 9. 190p. cit., Ref. 16.
E. (1988). talousalue economic
and
exclusively circulative (see Figure 3): the creation of a common market for telecommunications services is explained by development trends in business, industrial life and home economies,14 but at the same time this creation effort forces companies and other organizations to join the planned development. l5 If the shift to electronic trade would be guided by free market forces or other central organization-led reguonly,i6 without any government lation, the shift into electronic trade would probably be slower. Also the initiators for establishing trading networks would probably be different, as industries would be the main designers instead of public institutions like EFTA and EC working groups. As Figure 3 shows, the decision to shift into electronic trade depends no more on free market forces or free will in corporate management. Instead, the development is accelerated by centralized planning, which at first prioritizes the companies in EC countries ahead of all others,” and then forces them to turn into electronic trade by creating the facilities and common market for it.t8 Countries, in practice private companies, outside the EC are affected by the same planning and same common markets, as their economies are dependent on trade with EC countries, and because electronic trade usually involves both trading partners. Expressed in quantitative figures, economic dependency means that the EC is the most important trading partner for Scandinavian (and other EFTA) countries. In 1986 exports from the EC to EFTA were 25.5 per cent of all trade, and imports 23.1 per cent. In Finland alone, exports to the EC were 42.2 per cent in 1987, and imports 44.4 per cent.” The other forms of dependency are the
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Electronic
trade and internationalization
electronic trading facilities, which will work only if both trading partners have the same facilities. Therefore full adoption of electronic trade in the EC area would also involve the most important trading partners if the EC countries decided not to use the old communication and data interchange practices after establishing the new trading systems. To analyse the shift into electronic trade, we can examine the effects of the changes in the world market. These effects encourage further companies to use electronic means in their trade. Examples are: 1. 2. 3.
The increase and geographical spread of closely partners and other interested organizations. The impact on production costs. The impact on contracting and deliveries.
bound
trading
The increase and geographical spread of trading partners As mentioned earlier, the changing balance in the world market causes a quantitative growth of competitors, other interested organizations and relevant activities for an individual company or corporation. The location of these interest groups may differ from those which the company is used to, as these groups may operate on a geographically widespread area. For an individual company this means increased information requirements. In addition, this information has to be gathered from a very large area, processed centrally and delivered maybe to a global organization. As explained by the themes used in Figure 2, the increase in the number and geographical spread of competitors and other interest groups encourages application of electronic trading facilities in the early phases of trading. As a consequence of the described changes, the forms of electronic trade in this phase would comprise the use of information service systems for preparing corporate/ company level negotiations and strategic operations. This same external cause implies the use of electronic communication systems both inside the corporation, and between the corporation and its external interest organizations. The reason for the use of electronic means instead of manual means, phone calls or face-to-face negotiations in this context is the large number of relationships to be managed, and the problems that the timezones cause in global communications. Electronic means do not, however, remove all personal negotiations or written documentation, but their role will be made more important by the increase of global business relations. The impact on production costs
"PORTER, M.E. (1984). Strategia kilpailutilanteessa: Toimialojen ja kilpailijoiden analysointitekniikat (Competitive strategy: Techniques for analysing industries and competitors). Oy Rastor Ab.
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In Finland, the industrial basis of the economy rests heavily on the paper and metal industry. Both represent the mature or regressive branches in Porter’s classification’s and have already met great difficulties in international markets. For example, Korea and Yugoslavia produce ships at lower costs than Finnish shipyards, and the strengthening of European cooperation threatens the whole metal industry by way of production inside the common market. The paper and paper product industry has similar difficulties, as the EC may replace imports from Scandinavian countries by its own production and substitute raw materials. In general, all such industries in Scandinavia that have high labour costs, and/or that may easily be replaced by production in other countries, are threatened by production in the EC and newly industrialized low cost countries. If the quality of products is about the same,
J. KUULA
Scandinavian industries have to find new ways to compete. In the EC market, political relations between EFTA and EC may help trading, but in other markets this does not help much. Furthermore if we leave such means of competition as product differentiation out of consideration in this context, companies have no other possibility than to lower their costs, produce outside Scandinavia or tie their customers, suppliers and maybe other partners to their business somehow, for example, by information systems. The idea of tying is that organizations would trade with each other, even if someone else would offer the same products more cheaply. The above arguments favour building information systems in the lute phases of trading described in Figure 2. These systems, that again are one form of electronic trade, represent mostly the interorganizational which typically result in lowered costs and long-standing systems,‘l relations between trading partners. The international applications of these are few in typical Scandinavian industries, but the national applications may have an effect on international trade as well, if the advantages are marked. The problem in the Finnish metal and paper industry in this context is that the production phases that have been located in Finland are highly automated already, so that new systems relations between suppliers and producers would not improve production much. The improvement created by interorganizational systems (10s) could therefore be achieved by applications built between production and phases coming logically after that. In the paper industry, for example, this would mean systems built between production/marketing organizations and mass users of pulp, paper or paper products. The direct systems connection could also be replaced by electronic market applications, such as those that Malone has talked about.** In practice, it would be a question of several IOSs, so that the host organizations of the systems would be producers in Finland (or in other Scandinavian countries) and maybe subsidaries in other countries, and user organizations would be buyers, business partners, sales organizations or similar all over the world. The impact on contracting
“Op.
cit., Ref. 8.
220p. cit., Ref. 6. 230p. cit., Ref. 2. 240p. cit., Ref. 12.
and deliveries
International trade requires many kinds of trading documents because of various payment practices, currency management, insurances, customs clarifications, etc. These practices increase trading costs in almost all international trade and slow down deliveries. In Europe, the EC countries have decided to remove these technical barriers of internaexchange into electronic tional trade,23 and turn the needed document companies, these decisions will mean reduced form.24 For individual transportation costs, faster deliveries and faster negotiations in the contracting and delivery phase as a result of electronic document interchange. The electronic trading facilities would therefore concern mostly the very late phases of trading, and, as described in Figure 3, these electronic means would be both a natural consequence of changes in business, and a gradually rising force due to centrally managed planning and establishment of international infrastructures. The companies do need the electronic document interchange and even real-time transportation follow up, but they can choose whether to build own applications for it, or whether to use ready built standard systems. In the European area, the ready built systems cannot be ignored, so even companies outside the common market have to join it. On the other
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Electronic trade and internationalization
hand, individual systems might offer additional when trading outside the regionally standardized
advantages, systems.
at least
Conclusions The paper described how the competition in the world market is changing, and how the EC countries respond to this competition by creating a European common market for trade, and a special common market for telecommunications services and equipment. The changes in international competition affect communications and information activities in individual companies, which we analysed phase by phase by studying the effects on a single trading process. Also area1 developments in Europe, the creation of a common market and the market for telecommunications services forces additional communications and information activities on companies, so that the companies are led to adopt such electronic means of trading, which are here called electronic trade. The whole concept of electronic trade consists of communications systems, information service systems and data interchange systems, which have their specific roles in different phases of trading. In the early phases of trading, which include strategic planning and management, as well as many other negotiations, the most important forms of electronic trade are various information service and communications systems. These are so called open systems, which do not tie the user organizations as users. In the later phases of trading, system connections become tighter, and tie customers, suppliers, partners and similar bodies as long-standing users of the systems. These forms of electronic trade, which will be used mostly in the late phases of trading, include interorganizational systems, electronic data interchange systems and electronic market systems. The external pressures that affect the shift to electronic trade increase the information requirements in the strategic management phase, and encourage the building or improvement in information service systems and communications systems in the early phases of trading. In later phases, competition, cost pressures and increasing cooperation between EC countries in Europe force companies to make stable customer relations in other ways. For this purpose, various interorganizational systems are a logical answer, and a suitable form of electronic trade. In the even later phases, in the contracting phase and during deliveries and transportation, the speed of sales negotiations and deliveries, as well as the punctuality of transportation are the relevant factors in competition. This influences information activities so that electronic market systems, electronic document interchange systems and transportation will be adopted. These systems may be built by companies, who use them, or by public or commercial service providers. In the European area, EC countries will build common information service facilities for their trade, which at the same time forces companies to adopt them. As important trading partners, this also concerns countries outside the EC, especially Scandinavian and other EFTA countries. It is too early to say whether electronic trade could promote internationalization at a company level. The views presented here are merely those necessary to maintain market position. If such aspects as legal hindrances or high duties against trading in the European common market or some other important trading area are not applied to countries like Finland, Sweden or Norway, electronic trade might 190
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25Foreign Trade, Monthly survey 3, Statistical Bureau of the Board of Customs, Finland, 1988. “Statistical yearbook of Finland 1987, Central Statistical Office of Finland, 1987. 271bid. “Op. cit., Ref. 25.
promote internationalization in the long term. This, however, concerns mainly Scandinavian countries whose internationalization process has followed quite a similar form since the 1960s and has been based mostly on the paper and metal product industries. As the internationalization process in these industries has advanced to the point where the companies have already created a worldwide network of manufacturing and sales units, the shift into worldwide information networks and electronic trading systems has become a reality. After establishing electronic systems, volumes of sales might increase, and even new customers might be attracted to order regularly. This would be one practical form of promoting internationalization, and the other, moving into totally new market areas, might follow after that, if no technical restrictions prevent it. The use of tight interorganizational systems is to better those industries, which have long life expectancies. The two major Scandinavian industries, paper and metal industries, are Porter’s named regressive branches, which does not encourage one to expect much increase in revenues in these branches. However, statistics do not yet show a decline in the use of paper and paper products, which encourages one to continue investing in the paper industry. For example, the paper and graphics industry has increased its sales by 29 per cent from March 1987 to March 1988, and by 9 per cent during January to March 1988.25 During the five-year period from 1980 to 1985, the paper industry has kept or slightly increased its sales level, so that only sales of pulp have decreased somewhat.26 The situation in the metal industry is not so optimistic as sales figures slightly declined in [email protected] From March 1987 to March 1988, sales of metal products and machine industry dropped by 22 per cent. 2x The immediate reason is, however, not the changes in the world market or in the European economy, as the metal industry in Finland has been strongly dependent on bilateral trade with SEV countries. When these sales are falling, they cannot easily be replaced by sales to other countries, which shows as a depression in the statistics. Obviously the metal sector will be reorganized in Finland as a consequence of decreased sales, but those companies that will survive, may need and use the means of electronic trade discussed earlier in this paper. The internationalization history in the metal industry is much like that in the paper industry, and knowhow and quality of work are traditionally high. That means, that not all of the metal industry will die in Finland, and those that continue will probably be stronger than ever.
191