Sources of value creation in born global companies

Augustyniak, Dobrochna Article Sources of value creation in born global companies International Journal of Management and Economics Provided in Cooperation with: SGH Warsaw School of Economics, Warsaw Suggested Citation: Augustyniak, Dobrochna (2017) : Sources of value creation in born global companies, International Journal of Management and Economics, ISSN 2543-5361, De Gruyter Open, Warsaw, Vol. 53, Iss. 2, pp. 7-22, https://doi.org/10.1515/ijme-2017-0009 This Version is available at: https://hdl.handle.net/10419/309634 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/ DOI: 10.1515/ijme-2017-0009 International Journal of Management and Economics Volume 53, Issue 2, April–June 2017, pp.7–22; http://www.sgh.waw.pl/ijme/ Dobrochna Augustyniak1 Faculty of International Business and Economics, Department ofInternational Economics, Poznań University of Economics andBusiness, Poznań, Poland Sources of Value Creation inBorn Global Companies Abstract Research about the phenomenon of rapid internationalization of small and medium size companies has evolved over the last two decades. Nevertheless, questions about business models or value creation inborn global enterprises are rarely addressed inthe literature. The objective of this article is todevelop atheoretical framework for analyzing the sources of value creation inthe business models of international new ventures (INV) global companies, starting with adapting the model by Amit and Zott [2001, 2010] toearly internationalizing venture. Current literature on international entrepreneurship, business models and value creation is also used as abasis for suggesting future empirical research recommendations. Keywords: born global, business models, sources of value creation JEL:F23 Introduction It has been over 20 years since the first journal articles on the phenomenon of rapidly internationalizing entrepreneurial companies, referred toas “born global companies” [Rennie, 1993] or “international new ventures” [Oviatt, McDougall, 1994] 2 were published. © 2017 Dobrochna Augustyniak This is an open access article distributed under the Creative Commons Attribution-NonCommercial-NoDerivs license (http://creativecommons.org/licenses/by-nc-nd/3.0/). Dobrochna Augustyniak 8 Since then, asubstantial body of research has intended tolearn and analyzed the characteristics of these enterprises and aimed at explaining their behavior and international expansion. An emphasis on the entrepreneurial facet of rapid internationalization has contributed tothe emergence of the International Entrepreneurship field of study, which focuses on small and medium companies (SMEs) entering foreign markets. This paper extends international business research by linking the notions of value creation and business model concept toexisting knowledge about early internationalized ventures. Abusiness model approach allows toanalyze aborn global company inthe context of its relations with external entities and evaluate the process of value creation on amore systemic level. Consequently, the following research questions are formulated: RQ1: What constitutes abusiness model of aborn global company? RQ2: What are the key sources of creating value inabusiness model of aborn global company? The literature on international entrepreneurship, business models and value creation was used toidentify the key components of aborn global company’s business model and its sources of value. The article is organized as follows: we briefly present different views on the notion of value inthe economy and management, using the work of Amit and Zott [2001, 2010]. Different attempts tointegrate business model perspective and value creation in international entrepreneurship research are also discussed. The author concludes by proposing an interpretation of the business model concept inthe context of born global companies and suggests further empirical research on the sources of value creation in these firms. Despite the wealth of research related toearly and rapid internationalization of the firms, much work is still needed. In today’s economy, characterized by widespread internet use and globalization, these firms are increasingly common [Cavusgil, Knight, 2015]. The new generation of entrepreneurs, raised inthis environment inwhich access tointernet and further network formation is common, typically perceives the world as market with their products. This approach has significant implications for national economies: born global companies offer potential growth and employment, enable transfer of knowledge, and co-create high-value-added activity clusters. They are forming new global industries, creating stocks of skills, knowledge, and innovation as well as highlight their country’s potential and positive image as atrade and investment partner [Eurofund, 2012]. Typically, born global companies, as newly established units struggle with alack of resources and experience. Yet managing an international presence is demanding and requires an entrepreneurial orientation characterized by pro-activeness, innovativeness, perseverance and passion [Zahra, 2005; Gerschewski etal., 2014, 2016; Cavusgil, Knight, 2015; Zander etal., 2015]. Overcoming the obstacles and meeting the demands and requirements is often achieved by concentrating on high quality products tailored tospecific client needs and enabling access tovital resources through networks [Cavusgil, Knight, 2015]. The dynamic capabilities perspective, common inthe literature identifies organizational learning as an effective driver of early internationalization [Knight, Sources of Value Creation inBorn Global Companies 9 Cavusgil, 2005; Weerawardena etal., 2007]. In the light of limited resources and ahighly competitive, international environment, born globals need tocarefully evaluate their performance financially, and also interms of operational and organizational effectiveness [Gerschewski, Xiao, 2015]. Many authors also point toapredominance of differentiation and focus strategies inthis group of companies [Zahra, 2005; Zander etal., 2015]. Targeting homogenous groups of customers inglobal niche markets allows them toexploit economies of scale and lower costs of adaptation. This article’s contribution tothe current field literature including international business and international entrepreneurship literature lies inanalyzing –incombination –the born global firm, its business model, and then sources of value creation. We therefore reveal key elements of the sources of value bearing inmind the international environment and flexibility of the company. The research has also some practical implications, guiding the managers of small and medium international companies how toimprove the mechanism of value creation intheir enterprises. The Concept of Value Cleverly designed value creation processes and value capture processes allow companies tobuild sustainable competitive advantage and constitute the basis for achieving financial success [Di Gregorio, 2013]. But value itself is an ambiguous concept. The economic literature addresses value inmany different contexts and frameworks, ranging from strategy toentrepreneurship, economics and marketing [Di Gregorio, 2013]. For example, financial value can be interpreted as the financial value of the enterprise or abrand; the value appropriated tothe customer or captured by acompany inatransaction. Thus, when considering the concept of avalue, one should specify the type of value and stakeholder that is addressed. Baier, as cited inHaksever etal. broadly define value as “the capacity of agood, service or activity tosatisfy aneed or provide abenefit toaperson or legal entity” [2004, p.292] They also distinguish three dimensions of created value: financial, nonfinancial and time (that is, benefits realization rate, saved time and the time frame during which the benefits are obtained). Another interesting interpretation of value is presented by Di Gregorio, who defines it as “potential or realized utility within apopulation” [2013, p.40], which addresses the wide range of users towhom value could be targeted and also embraces potential value that could be captured inthe future. Utilized value should be therefore understood as captured value, which is usually smaller than created value. Concentrating on the value created by an enterprise for the customer requires further clarification. Regarding the strategy and process of creating value inherent toacompany, Bowman and Ambrosini [2000] emphasize the distinction between use value and exchange Dobrochna Augustyniak 10 value. Use value is the value of agood perceived by the customer. It is, therefore subjective and based on customer beliefs, needs, unique experiences, expectations, wishes and wants. Exchange value is the price of agood that the customer agrees topay when atransaction takes place. Although the organization captures value at the moment of exchange, use value is equally important because of its influence on aconsumer surplus (translation of use value of agood/service and the price paid for it). Customers will eventually choose products that offer the largest consumer surplus [Bowman, Ambrosini, 2000]. The question of value creation is related toafundamental economic issue: the creative transformation of inputs into outputs performed by the enterprise. Outputs should be valuable for potential customers, but also, according tothe resource-based theory of afirm, ahigh value of the inputs (resources) is needed tocompete successfully inthe market [Barney, 1991]. Given the importance of valuable resources, it is essential tonote that the value is notcreated by (non-human) resources itself. Rather, tangible and intangible resources are deployed by individuals and organizations inthe process of adding the value [Di Gregorio, 2013; Spender, 2014]. Consequently, entrepreneurial labor capable of managing the transformation of resource inputs is crucial inuse value creation [Bowman, Ambrosini, 2000]. Business Models and Sources of Value Value is acore business model concept that can be noticed tobe used inmany researches. Abusiness model is often referred as the firm’s logic for value creation and commercialization [Osterwalder etal., 2005]. DaSilva and Trkman [2014] note that abusiness model is about generating value through transactions, taking advantage of specific combinations of resources. As such, it reflects the implementation of acompany’s strategy within aspecific value network and time framework. There are different views on the business model elements, but many of them also directly refer tovalue creation, delivery and capture (exemplary propositions are presented intable1; for an extensive review see Osterwalder etal. [2005] and Richardson [2008]). Other theoretical propositions analyze the subject from an activity system perspective. Amit and Zott define the business model as “asystem of interdependent activities that transcends the focal firm and spans its boundaries” [2010, p.216], which depicts “the content, structure and governance of transactions designed soas tocreate value through the exploration of business activities” [Zott, Amit, 2001, p.511]. This view emphasizes the performance of transactions and activities but this requires resources and particular capabilities tobe inplace. As aresult, the authors distinguish between three basic elements of the business model: Sources of Value Creation inBorn Global Companies 11 • activity system content –which activities will be performed? • activity system structure –how these activities are linked? (connections and hierarchy) • activity system governance –who will perform these activities? TABLE 1. Theoretical perspectives on acompany’s business model Source Elements of abusiness model Chesbrough and Rosenbloom 2002 – Value proposition – Market segment – Value chain – Cost structure and profit potential – Value network – Competitive strategy Osterwalder etal. 2005 – Value proposition – Target customer – Distribution channel – Relationship with customers – Value configuration – Core competency – Partner network – Cost structure – Revenue mode Richardson 2008 – Value proposition – Value creation and delivery system – Value capture S o u r c e : own elaboration. Onetti etal. [2012] sought tointegrate different theoretical perspectives of business models and incorporate into this concept the notion of location/internationalization. Based on an extensive body of literature, the authors observe that existing definitions of business models and its elements vary greatly. Among most cited components, there are: processes/ activities/value chain, customer (relationship/interface) and value networks (partners/ actors/suppliers/alliances). We recognize that for new tech-based firms internationalization is amultidimensional, relational and knowledge-based augmenting process, and for these companies entrepreneurship, innovation and internationalization should be seen holistically3. Indeed, some authors note, internationalization itself is kind of innovation for SMEs [Veglio, Zucchella, 2015]. As aresult, the business model is defined inrelation tothree areas of managerial decisions/activities: • focus (the selection of activities), • modus (internal organization and value network design), and • locus (location of activities). Dobrochna Augustyniak 12 This framework allows geography and networks tobe included as additional dimensions of business model research. It shares some characteristics with the previously cited activity system perspective, although there are differences around attributing outsource/ insource decisions and incorporating the geographical configuration of value chain inthe second model. The business model perspective developed by Onetti etal. [2012] seems tobe more accurate for analyzing international new ventures (INV), because of its high level of internationalization and the role of foreign markets intheir strategy. Referring tothe frameworks of entrepreneurship and strategic management research (namely: strategic network theory, value chain, transaction cost economics, Schumpeterian creative destruction and aresource-based theory of the firm), Amit and Zott [2001, 2010] propose asources of value creation model ine-business, which is also applicable toother enterprise types. Total value is understood as “the sum of the values appropriated by all the participants inabusiness model, over all transactions that the business model enables” [Amit, Zott, 2001, p.515]. The share of appropriated value is divided inaprocess of bargaining between participants [Brandenburger, Stuart, 1996]. Instead of treating the firm as aunit for analysis, Amit and Zott suggest that abusiness model would be more appropriate for value creation analyses because it considers the firm together with its environment, taking into account value that emerge from the network of companies and notonly the company itself. This proposed business model is consistent with other theoretical frameworks of entrepreneurship and strategic management that permits the role of partner and customer networks tobe considered invalue co-creation [Storbacka etal., 2012] and toinclude other stakeholder perspectives (e.g. society) that may help inconstructing more sustainable model [Yang etal., 2017]. Based on theoretical research and the analysis of 59 e-business companies, Amit and Zott [2001] identified four main dimensions essential toafirm’s value creating potential: efficiency, novelty, lock-inand complementarities. Efficiency refers toreorganizing activities within the business model toreduce transaction costs. That could be achieved, e.g., by internalizing some external processes or reducing information asymmetries through implementation of acommon data system inthe value chain. Novelty refers toproduct, process, organization or marketing innovation, and also anew structure of activities embedded innew business methods. Value creating potential stems from attracting customers or other stakeholders using novel solutions, and retaining them –referred toas alock-in. There are many ways toencourage customers torepeat transactions or partners todeepen relationships, including loyalty programs, dominant design proprietary standards, personalization and customization of offerings, building communities, and positive network externalities. Enhancing value generation by complementarities is based on bundling different activities, assets, outputs or technologies toincrease revenue. These four dimensions are interdependent and could further strengthen each other. Sources of Value Creation inBorn Global Companies 13 Some authors attempt toincorporate value taken from abusiness model perspective into International Entrepreneurship. The following partbriefly presents existing research inthis field. Business Models and Value Creation inInternational Entrepreneurship Research With afew exceptions [Mets, Kelli, 2011; Servantie, 2011; Lee etal., 2012; Johansson, Abrahamsson, 2014; Bouncken etal., 2015], rapid internationalization of SMEs has notbeen studied inthe context of the evolution of their business models. The differences between the domestic and international environment suggests, that the company may decide about an adjusted business model or implementation of parallel models when entering foreign markets. Born global companies can choose from their beginning abusiness model suitable for aglobal niche market. Most researchers concentrate on evolution of the business model inthe course of internationalization [Servantie, 2011; Lee etal., 2012] or internationalization through business model evolution [Bouncken etal., 2015]. As noted by Servantie [2011], studying the process of learning and adjusting the business model allow tounderstand why and how businesses internationalize soearly, as well as their international competitive advantages. Using the GRS framework, which distinguishes three main aspects of abusiness model: generation, remuneration and sharing value, the author analyzed six French born global companies. Exploratory case studies were used toconstruct aprocess based model of early and rapid internationalization. The conclusions are consistent with the born global literature. First, early internationalization is imposed by the nature of the target market and linked tothe choice of partners invalue network. Second, the author highlights the important role of networks ininternational entrepreneurship, as well as earlier experience and project leaders knowledge about the industry, which enable avalue network creation. Lastly, born global companies are subcontracting non-core activities and maintaining control over all activities related totheir know-how, innovation and business development strategy. Bouncken, Muench, Kraus [2015] have also studied the role of business model innovation inthe internationalization process of born global companies. They define the business model as “astrategic and dynamic value-creation process among avalue network that is characterized by the way the type of product or service is linked toaparticular group of customers using aspecific communication and delivery method and accelerates, by adaptation, the early internationalization process” [Bouncken etal., 2015, p.250]. They rely on the proposition presented by Rask [2014], who distinguished four types of business models, characterized by different levels of market and production globalization (domestic-based, Dobrochna Augustyniak 14 export-based, import-based, semi-global) and possible ways of internationalization through business-model innovation. While the adaptability and flexibility of the business model is emphasized, it is also suggested that the competitive advantage of born global firms could result from repeated implementation of the same business model inmany countries and continuous learning experienced during this process. Although concentrated on the early stages of MNC’s development, research conducted by Dunford etal. [2010] describes indetail how replication worked incase of rapid internationalization of ING Direct. This was acomplex venture, as the initial assumptions and vision of abusiness model were verified over time and evolved with the accumulation of knowledge. The first stage of this process was establishing the core business model elements (called “clarification”). Because of the novelty of the concept it was developed, adjusted and improved by doing, along with the concept of entering into foreign markets. Together with changes inthe generic business model, it was also adjusted tolocal conditions (“localization”). New subsidiaries were encouraged totry new processes and products (“experimentation”) and then share, copy and adopt ideas and solutions, that emerged from learnings inother countries (“co-option”). This business model vision illustrates an evolutionary approach and stresses the need of organizational learning inan international context. Besides the researchers’ interest inpaths of internationalization and business model evolution, some of them tried tofind distinct business model types adopted by born global ventures. Mets and Kelli [2011] identified three business models for globalizing SMEs: replication BM (copying adomestic local model on global market), leverage BM (having their own sales channel on the internet and/or mobile environment) and freemium BM (offering some basic functionality for free and charging customers for premium options). In the empirical part, they performed acase study describing three companies linked tothose business models, whose ways of becoming global differed greatly. It is worth noting that some companies among new knowledge-intensive industries were using traditional business models and various forms of customer engagement increating value were also popular among studied enterprises. The importance of knowledge accumulation and learning was stressed, although there were differences between the time companies expended on these processes (depending mainly on the economy and industry). In adifferent study, Johansson and Abrahamsson [2014] matched the business model evolution through internationalization process with sources of value inborn global companies. They found that firms used business model innovation togrow internationally and navigate value chains. Based on three exploratory case studies, the authors argued that the initial main source of value was novelty. In the second stage of company development partnerships and the capabilities of building avalue network, paired with adeep understanding of user needs (partners’ and customers’ lock-in) became critical. The authors also emphasize the role of dynamic capabilities, like sensing capability, entrepreneurial capability and relational capability inbusiness model innovation and internationalization. Another vital insight is that firms often exploit more than one business model simultaneously, and Sources of Value Creation inBorn Global Companies 21 Di Gregorio, D. 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