Tendering as a means of Export for SMEs and an Opportunity to Overcome Psychic Distance
(Cite: see end of article)
This is the second in a short series of articles that explores the potential of tendering as a alternatives means, for SMEs to export and move into new markets. It should be read in the context of Article 1.
Traditional Forms of Export
In Article 1 we explore the Uppsala traditional form of export; a careful and staged approach to internationalisation. As such, the model suggests that initial internationalisation is commonly led by a staged and gradual movement towards different operating structures that carry higher risk. This is a continuum of growth in the new market that would typically start with export, then gradually extend to sales subsidiaries or agents, then move towards the development of production and distribution facilities among others.
Referring to their 1977 Model some thirty years later, Johanson and Vahlne (2009) describe two change mechanisms that tend to occur and influence internationalisation: “first firms change by learning from their experience of operations, current activities, in foreign markets. Second that they change by the commitment decisions that they make to strengthen their position in the foreign market.”
This relationship is a core element of the model and fundamentally underpins the incremental nature of the model i.e. that decisions are made to commit to new markets when knowledge of the market is sufficient to minimise risk of entry.
Johanson and Vahlne (2009) refer to this approach as the establishment chain i.e. the gradual establishment of the firm in new markets. As such the focus of the stages model is on the firm and the establishment of the firm rather than the environment, the market, stakeholders or customers.
A central influence on decision making is what the authors refer to as Psychic Distance.
Cultural perception is given significance by Johanson and Vahlne (1977) as a key influence on firms decision making. The principal is that firms will go first to new markets that they most easily understand i.e. that they perceive to be close to in terms of language, culture and political systems. This is referred to as psychic distance and explored in more detail in later sections.
The procurement landscape, at least in the west, offers a potentially level playing field, with commonly English used as the main language of business. This offers significant opportunity for SMEs to engage in contracts outside of the domestic market. In the EU for instance, opportunities are advertised at both national and EU levels and are ‘open’ to all firms from member states. This has the potential for UK and Irish firms (as an example) to bid for contracts in mainland Europe, where there are similar tendering requirements to the home market. This means commonly no need for: independent representatives, establishment of foreign sales subsidiaries or foreign production or manufacturing. This works for all EU countries.
This does not mean the end of psychic distance – many EU firms will still look to tender to their neighbours as a first venture in to new markets. While for other the practicalities and costs of travel are a bearing on where they will look for tender opportunities. Of course language remains a factor:
“we first looked to the UK in terms of tendering for contracts… same language, similar operating conditions and laws.”
Professional Services firm based in Cork, Republic of Ireland.
“to be honest we looked to see where we could get to and back from quickly and easily as a means of deciding which countries to tender to. I don’t want to give the impression that Easyjet and Ryanair shape our policy on internationisation, but at the same time the first tenders we went for were based in cities where those cities carried to.”
Manufacturing Firm, Greater Manchester.
Tendering for contracts in non-domestic markets offers an genuine alternative for SMEs to traditional forms of export and opportunity to overcome psychic distance. This is a low risk form of export, often removing need for higher risk requirements of traditional export such as: independent representatives, establishment of foreign sales subsidiaries or foreign production or manufacturing. At its simplest, tendering offers firms the opportunity to align what they excel at to international markets that have identified similar need. This does not mean that barriers don’t exist; ask any small business owner that has engaged in tendering on the barriers and you will get a firm and lengthy response. Crucially, though with the right free or inexpensive support, winning work in new markets, through the writing of powerful tenders is a highly effective means of achieving export for SMEs.
Cite: McKay, J.I. (2016) Tendering as a means of Export for SMEs and an Opportunity to Overcome Psychic Distance. Winning Tenders Academy