internationalisation of digital media companies

November 15, 2002

Tommi [email protected] School of Economics

EuroPrix Scholars Conference 2002 Tampere

Internationalisation of the Finnish digital media industry -challenges and experiences


• Background for the analysis• Theoretical approach to Internationalisation• Digital media industry - what is that?• Digital media industry in Finland• Internationalisation patterns in the Finnish digital media industry• Conclusions

This presentation is based on thorough desk and field studies

• The background for the study – Helsinki School of Economics and Business Administration & LTT-Research Ltd.

Interactive media group – University of Design and Arts Helsinki&Culminatum Oy

Interactive media competence centre

• Main objective of the study was to analyse the internationalisation patterns on professional business services:

– To identify the Finnish digital media industry and its potential for internationalisation– To analyse the digital media industry's internationalisation patterns in both company and industry

levels– To analyse the digital media industry's business network, its structure and its dynamics

• Initial study was carried out in two phases during 1998-99– Currently we are updating the analysis and new results will be published early 2003

Industry & client surveys, structured interviews and in-depth case studies were carried out

• Twelve company interviews (autumn 1998)

– Digia Oy / Pekka Sivonen– Grey Interactive Oy /Antti Romppainen– Icon Medialab Finland /Alex Nieminen– Interaktiivinen Satama Oy / Janne

Ruokonen– Nedecon Oy / Jesse Jokinen– Netmill Oy / Jari Ala-Ruona– Partner Group Oy / Olli Heikkilä– Tietovalta Oy / Mika Uusi-Pietilä – Quartal Interactive Oy / Aarne Aktan– Terranova Visuals Oy / Kari Happonen– To The Point Oy / Tatu Kuivalahti

• Basic Facts’ Collection (autumn 1998)– Through public registry analysis and

identification – Basic facts collected from chosen

companies (N=355 kpl) via e-mail or by phone

• Industry & Client Survey (autumn 1998)– Digital Media Companies:

WWW-Survey, sample 93 companies, 72 answers (78%)

– Digital Media Company Clients: WWW-Survey, sample 28 large digital media clients, 20 answers (71%)

• Two case studies (autumn 1999)– confidential information– one design and one technology-oriented

digital media company



Companies have multiple reasons for international activities. International operations have to create benefits to the actor

Source: Czinkota & al. 1996, p, 403, Luostarinen, 1979

Source: adapted from Luostarinen, 1979

Proactive reasons Reactive reasons • Profit advantage • Unique products • Technological advantage • Exclusive information • Managerial commitment • Tax benefits • Economies of scale

• Competitive pressures • Overproduction • Declining domestic sales • Excess capacity • Saturated domestic markets • Proximity to customers and ports

Macro-factors Micro-factors Milli-micro-factors

1. Push factors • Smallness and openness

of domestic markets • Periferic location 1. Pull factors • Large size and openness

of international markets

• Economies of scale • Benefits from specialisation • Covering R & D expenditure • Utilising global possibilities • Benefits from integration of

foreign operations

• Endurance of risk and uncertainty • High level of personnel learning • High level of internationalisation in

personnel • Personnel's motivation for interna-

tionalisation

The three key elements form a complex relationship network

Source: Hokansson & Johansson, 1992

Key target for a company is obtain a dominant position in its business networks

Actors control resources; some alone and others

jointly. Actors have a creating knowledge of

resources

Activities link resources to each other.

Activities change or exchange

resources through use of

other resources

Actors perform activities. Actors

have a certain knowledge of

activities

Actors-at different levels -from individuals to groups of companies- aim to increase the control of the network

Resources-heterogeneous-human and physical-Interdependant

Activities-transformation act-transaction act-activity cycles-transaction chain

BusinessNetwork

Network internationalisation theory bases on different situation in the markets and in the firm

• Network Internationalisation modes– by international extension, i.e. through

establishment of positions in relation to counter-parts in national net that are new to the firm

– by penetration, i.e. developing the positions and increasing resource commitment in those nets abroad that the firm has already positions in

– by international integration, i.e. increasing co-ordination between positions in different national nets

• Leads to different “situations”

”The firm establishes and develops positions in relation to counterparts in foreign countries":

Degree of Internationalisation ofthe market

/ production networkLow High

Degree ofInternationalisation

of the firm

Low The EarlyStarter

The LaterStarter

High The LonelyInternational

TheInternational

AmongOthers

Source: Johansson & Mattson. 1988, p.202

The new “born global” companies are dependant on their network relationships

Source: adapted from Madsen and Servais, 1997

Traditional Firm (Established)

Born Global (Start-Up)

Resources • Developed gradually • Resources build into the

organisation

• Limited • Resources accessed via networks • Dependence on outside resources

Internationalisation Strategy

• Gradual commitment • Formation of stable units • Thorough and

conservative planning

• Utilisation of hybrid modes • Dependence on networks • Client followership to new markets • Fast and intense extension • Highly dependent on the experiences of the

entrepreneur Industries • Industrial manufacturing • High tech companies

• Professional Services Markets • Experiences in domestic

markets are utilised in international markets

• Operations are directly planned to international markets, no domestic learning

Theoretical background • Stage models • Network models Situation in the Network model

• Early Starter • Late Starter or International among others

Traditional internationalisation considerations and issues

1) Target Customers:Who buys the product? Who uses the product? How is the product used? Where is the product bought? Why is the product bought? When is the product bought?

2) The Macro-environment:Geography, climate, economic, socio-cultural, political/legal factorsc) Governmental:regulations, tariffs, labelling, patents/trademarks, taxesd) Competition:price, performance, design or style, patent protection, brand name, services

3) Company’s ProductWhat are the physical attributes (size, design, materials, weight, colour, other). What are product’s package attributes (use instructions, warranties, repair/maintenance, spare parts, other), its expected profit contribution for each product adaptation? How will all of these matchthe market?

Source: Axelson and Johansson, 1992

Internationalisation considerations for a born global company

Network approach-based international entry check list• a) Actors and Bonds Identification

– What are the actors - customers, suppliers, competitors, public agencies in the business network? Which are the important relationships they have with each other and with other actors? Are they technical, social, administrative, legal of other ties?

• b) Power Structures– What are the relative positions of the actors in the network? What are the roles of the actors and what power do they have

in the network? What constraints does the network impose on the firm regarding, for example, possibilities of relating to other actors, areas, fields of applications, suppliers, etc.? What possibilities do specific potential partners in the network offer to the company as regards access to suppliers and resources controlled by others?

• c) Own relationships– What are the relations of the focal firm in the potential country market? Which are the direct relationships.? How can they

be used? Are there any indirect relations to actors in the potential host market, e.g. through contacts with partners in other local markets who in turn have direct relationships in the entry market?

• d) Resource mobilisation– How can resources of other actors be mobilised in support of the market entry? Who of the related actors should be

mobilised, why, for what and by what?

Source: Axelson and Johansson, 1992

Companies can gain multiple benefits by participating in network operations

• Increasing the value of the product/service – Product can become more attractive for its end user due to possible broader availability and wider

support• Accessing new markets

– Increased distribution channels• Enforcing production possibilities (e.g.increased production capacity)• Increasing technological know-how• Creation of supplementary growth• Improving the efficiency and strength of the organisation/knowledge• Improving economic situation, creating economic power

– E.g. cost & risk sharing and cuts

Source: LTT, 1992

Each company has to define its own objectives for co-operative operation modes

What makes network co-operation to succeed?

• The elements for a partnership success:– Mutual dependence of actors– The business potential of co-operation– Social bonds i.e. personal relationships between the key personnel– Compatibility of resources (e.g. technology)– Compatibility of objectives for the co-operation– Clarity of roles and responsibility spread– Agreement of practical principles and methods– Investments on the co-operation, commitment to it– The exit possibilities from the co-operation

Sources: Eräheimo & Lahti, 1991 & 1993; Wilson, 2000

Network co-operation has to benefit all its participants

A general model of business internationalisation was formed. The main objective is to obtain beneficial positions both domestically and internationally

Resource choice

Partner choice

Operation choice

domestic position

internationalisation

foreign position

International Markets

Domestic Markets

Actors

ResourcesOperations

BusinessNetwork

Macro-Network

Micro-Network



There are multiple actors in the digital media markets

The core of the network Extended network • Digital media companies (existing and new start-

ups) • Traditional media companies (print, radio, television,

cable companies) • Telecommunication operators • Communication equipment producers • Information technology (IT) equipment producers • IT Software and systems companies • Consulting companies • Advertising agencies • Audio-visual producers

• Financiers (venture capitalists, direct investors, financial institutions)

• Governmental organisations • Education and training organisations • Labour organisations • Research institutions

Seven related industries with blurry barriers

Traditional Media Companies

IT System and Software Companies

Audivisual Producers

IT Equipment Manufacturers

Telecommunications Operators

Managing Consultancies

Advertising agencies

Digital Media Companies

Digital media activities

• Three core activities are:– Planning and implementation of digital

media products and services– Internet-based advertising and

marketing services– Internet service offering

• The two supporting activities – Digital media consulting and training

• Two infrastructure-related activities – internet hosting and internet

connection services.

• Companies also operate in research and development projects

– either by own resources or in joint efforts.• Third group of operations are the

business network building activities.– formal and informal negotiations on project

co-operation, financing, sub-contracting agreements or possible research and development activities.

F our core, two supporting and two infrastructure activities

Planning and Implementation of Digital Media Products and Services

Internet -solutions

Intranet/Extranet Solutions

Electronic Commerce Systems

CD-ROM & DVDs

Information kiosks 3D-Design

Computer Games

Streaming Media Solutions

Internet Services Offering

Search Engines, News,Weather Services etc.

Virtual Communities

Electronic Commerce Sites

Internet-Based Advertising andMarketing Services

Direct Marketing via Internet

Banner Sales Agencies

Core ActivitiesConsulting

Training

Supporting Activities

Internet Connection Services

InternetHosting

Infrastructure Activities

Digital TV-solutions

Mobile Internet solutions

eLeaning solutions

Activities are based on five types of resources

Personnel Hardware Software Organisational Financial• Business• Technical• Design• Other

• Office prem-ises

• Productionmachinery

• Licences• Intellectual property

rights• Proprietary con-

tents• Production process

knowledge• Knowledge about

technology• Knowledge about

customers• Production software

• Strategies• Goals• Organisational

culture• Organisational

structures

• Finance for op-erations(e.g. R&D, com-mercialisation,internationalisa-tion)

The key resource is personnel of the company

Combination of technology, business, management, communication, design creates digital media understanding

Source: adapted from Helomaa & Väänänen, 1999 pp. 40-54

Cognitive psychologyPedagogy

Ability to combine media elementsInteractivity understanding

Ability to create new business modelsAbility to measure digital media impacts

Digital media understanding

Business expertise

EntrepreneurshipAccounting and finance MarketingInternationalisation

Technical expertise

Database designProgrammingIT system designIT system integration

Communications expertise

Digital graphics creationMultimedia manuscriptingCommunications process

understanding

Managerial expertise

Competence managementProject management

Communication skillsGroup work skills

The industry dynamics can be illustrated with a network diagram

Traditional Media Companies

IT System and Software Companies

Audivisual Producers

IT Equipment Manufacturers

Telecommunications Operators

Managing Consultancies

Advertising agencies

Digital Media Companies

Digital mediabusiness network

ActivitiesResources

Control /ownership

PerformanceKnowledge

Requirement

Position

Actors

Planning and Implementation of Digital Media Products and Services

Internet -solutions

Intranet/Extranet Solutions

Electronic Commerce Systems

CD-ROM & DVDs

Information kiosks 3D-Design

Computer Games

Streaming Media Solutions

Internet Services Offering

Search Engines, News,Weather Services etc.

Virtual Communities

Electronic Commerce Sites

Internet-Based Advertising andMarketing Services

Direct Marketing via Internet

Banner Sales Agencies

Core ActivitiesConsulting

Training

Supporting Activities

Internet Connection Services

InternetHosting

Infrastructure Activities

Digital TV-solutions

Mobile Internet solutions

eLeaning solutions

Personnel Hardware Software Organisational Financial• Business• Technical• Design• Other

• Office prem-ises

• Productionmachinery

• Licences• Intellectual property

rights• Proprietary con-

tents• Production process

knowledge• Knowledge about

technology• Knowledge about

customers• Production software

• Strategies• Goals• Organisational

culture• Organisational

structures

• Finance for op-erations(e.g. R&D, com-mercialisation,internationalisa-tion)



There are around three hundred digital media companies that generated a turnover of one billion FIM in 2000

Sales Margin

Turnover

Industry characterised by

mergers and acquisitions

2800 digital media employees by 2001 - total impact larger

• Finnish digital media companies recruited ~1000 new employees in 1999-2000.

• Yet, the total impact of the phenomena affected also traditional industries is is thus larger.

• 1/4 of the new jobs were part-time or free-lance jobs

Full-Time

Part-Time

Digital media activities are focused on the Finnish growth centers

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121212121212121212

323232323232323232

181818181818181818

Yritykset kunnittain 1998n = 314

135 - 135 (1)18 - 135 (3)

5 - 18 (6)2 - 5 (11)1 - 2 (36)

Current status of Finnish digital media industry – acknowledging economic realities

• Working in turbulent digital media industry is not an easy task• Current development trends in the companies

– From hypergrowth to cost efficiency– From hype creation to excess caution– From aggressive recruiting towards committing key individuals– From ”becoming rapidly millionaires” towards ”survival battle”– From pioneering towards a stardardised way of working– From optimism through pessimism into realism

• In addition, digital technology keeps on evolving

Main change: using digital media has become a businessstandard – no more premium pricing for digital media companies!



International markets possess their special characteristics

Domestic Markets International MarketsAbout actors • Some very competitive and growth seeking

new media companies• Finnish companies among the world leaders

in mobile technology

• Highly competitive markets• Many opportunities exist for fast movers• Heterogeneous technological know-how and

infrastructure• Few experienced and global players in new media• Large international IT actors are starting to be active

About resources • Well educated and skilled personnelavailable

• High-level of technological know-how• Limited number of international customers• Skilled users and advanced infrastructure

• Shortage of skilled & experience IT personnel• Financial capital available for well defined business

ideas and concepts• Many large customers available, but serving them

demands resources

About activities • Consolidation of companies via mergersand acquisitions

• Mobile communication creates newopportunities and activities

• Market size in 2000: FIM 1 billion, ~3000employees

• Internationalisation and globalisation is an actuality• Large international customer projects carried out• All major companies are building international

relationships

Internationalisation brings Finnish digital media companies to thinking their competitive edges

Domestic positioning features International positioning features• Subcontracting activities (at the mo-

ment only 10 %)• Companies knowledge of each other is

very good due to small markets• Governmental activities encourage for

networking, e.g. in R & D projects• Finland is the test laboratory for high-

tech solutions - > reputation of the trials

• Finnish companies have some subcon-tracting experience across borders, e.g.to the Baltic countries

• Only few companies have a strong in-ternational focus

• The new media companies can lever-age on the success stories of Nokia andSonera

• New international customers are ob-tained through business relationships

• Foreign competitors are entering andhave entered the Finnish market <-reputation

Companies were divided into six groups according to their internationalisation focus

• Global actors• Active growth seekers• Internationalisation trialists• Inward-internationalisators• “Stand-By" -companies• Locally focused companies

"Internationalisation for us is that we grow with our clients' operations. In other words this means that we

do not focus on geographical markets, but rather to client

markets.”

"We will not start to "pump ourselves" to foreign markets with our present limited resources. We want to be a strategic partner for some Finnish company needing

assistance in digital media solutions abroad”

"We see our internationalisation so that we want to work here in Finland for the

international markets. Internationalisation is crucial for our existence, but we want to be

located in here. This is why we need to belong to an international network."

Domestic positioning

International Positioning

International position

Domestic Position

impact

impact

Finnish New Media BusinessNetwork

International Markets

Domestic Markets

Macro-Network

Micro-Network

Advanced Infrastructure & skilled users

World leaders in mobile technology development (operators and equipment)

Consolidation of companies actuality

Limited number of customers

Some competitive and growing new media companies

Skilled personnel available

High level of technological know-how

Actors

ResourcesOperations

Mobile communication activities of high interest

Actors

Operations

Resources

Highly competitive markets

Heterogenous markets in technology skills and infrastructure

Many opportunities for fast movers

Lack of trained & experiencedpersonnel

Financial capital well available for good business ideas

Many large customers available, but operations demand resources

Global expansion for new media companies

Global network buildingLarge international projects

Internationalisation

Few experienced and global players

Subcontracting 10-15 %Companies know each other well, limited co-operationGovermental R&D support based on networking-> leads to more active networking

~FIM 1 billion~3000 employees

Only few internationally focused Finnish companiesExpansion through the Finnish "success stories" (e.g. Nokia & Sonera)Cration of international network through existing customer relationshipsForeign competitors have entered the Finnish marketsInternational financiers interested about FinlandFinland is the "test laboratory" in mobile communicationsInternational subcontracting relationships exist to some extentFinnish companies ether in "Late Starter" or "International Among Others" situation

Global actorsActive growth seekersInternationalisation trialistsInward-internationalisatorsStand-by companiesLocally focused companies

International dimension of the network make it even more complex and challenging

Companies use multiple strategies in their international entry. The most important is leveraging existing customer relationships

• Finnish digital media companies internationalisation modes

– Fast growth with the support of external financiers

– Fast growth via networking strategies– Acquisition of a local company in a foreign

country– Greenfield investments to a foreign country– Going with "luck", i.e. no planning, just 'ad

hoc' activities– Internationalisation with customer's operations

The most important channel for internationalisation are the existing customer

relationships

Totally agree20 %

Mostly agree60 %

Mostly disagree17 %

Strongly disgree3 %

“We have four internationalisation strategies: forming of an own subsidiary, forming of a joint venture with a local partner, expanding with our clients operations and exporting our own products, know--how and technology. Also we have discussed about participation to

different international alliances.“

Large digital media companies are more involved with international operations than smaller ones - business networks are crucial

Our company has international partners

Describes our relationships

well31 %

Describes our relationships

partially22 %

Does not describe our relationships

47 %

Our company has international partners

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

over 30 MFIM

10-29 MFIM

5-9 MFIM

1-4 MFIM

less than 1 MFIM

Com

pany

Tur

nove

r im

MFI

M

No answerDoes not describePartly describes Decribes

"We made our largest international deal so far through good personal relationships. We were extremely lucky.. Furthermore,

we were able to organise the project to be internationally carried out by our network."

Shortage of skilled personnel is the most limiting factor for international operations

0 % 20 % 40 % 60 % 80 % 100 %

Growthopportunities

Skilled personnel

Clients

Educationalresources

Financialresources

No answerNot enoughThey are scarceSufficientlyPlenty available

"Simply there are so few of those who can

say "Been there, 'done it!". This makes the entrepreneurs to

fear, become disappointed and/or at worst not to find the right contacts

abroad"

High expectations exist for internationalisation, but also high risks.

“In Sweden, market far behind Finland still about two years ago, digital media industry had a turnover of FIM 7 billion in 1998. We should not feel to sorry about ourselves but analyse thoroughly why the Swedes are so much more

successful. Yet, we should remember that this kind of “slow and conservative“ approach that we have in Finland may become more fruitful in the long run.“

“The future growth expectations are incredible, even outrageous. The bubble must break someday. There is so much air in the stock values of the international companies. Yet, if the expectations will become reality,

there is room for many new large and international players.“

“Internationalisation is most often based on growth and market share expectations dominated by external financiers. The companies seek for growth

for growths sake only. Do these companies remember to follow their profitability? - we are sceptical about that.“

International operations demand resources. Yet, they may bring higher returns for the same effort.

"If we, for example, form a subsidiary to London, we will hire a few locals and send a few persons from Finland there. They need an office, portable computers and accounting systems at minimum. Sounds easy - but - the problems arises from management allocation. Let's say we make one hundred units of turnover in

Finland. The London unit would make at the starting stages one unit more units later. Still, as we have noticed, the operation will take 20-30 % of our management time. Also it is difficult to obtain local customers, we are not a part of local business

network.

"In Finland, consulting and planning is badly compensated. The digital media companies under-priced their services a couple of years ago, and still we are

suffering from it. We have noticed that international customers are much more willing to pay for good planning, Finns just want the pure product, nothing else."

Create the mindset for being international and know your motives. Financing exist for well justified ideas.

"Special interest should be put on the mindset of being and becoming an international actor and reflect this thinking in all activities."

"The main question lie in the motive for internationalisation - why to do it? There is and will be market to be shared here in Finland, too. Foreign operations

will demand resources from domestic operations. Do we want to utilise them here or abroad and now or later? I do not know. Only thing I know that we

have to be ready to react"

"There is plenty of capital available. Still, we do not want pure money, we need grey hair expertise to supplement the investment. These kind of investors are harder to find. We want strategists to assist us, not short-term profit makers."

Governmental support efforts are fragmented and uncoordinated.

"The government should realise that in this business half a million FIM is in international context small potatoes. The investments needed for international penetration are much higher. We are doomed to small scale business without

large scale support”

"Oh, I wish so much that we would be able to get all the services from the same address or from the same advisor. It has taken at least a year from us to learn

the different application and discussion 'protocols' that different support or financing organisations have - it a really a pain - and I do not understand that

why don't these organisations co-operate?"



Four main statements rose from the study

• The internationalisation of the digital media industry does not differ from other professional service businesses

• The main driver for internationalisation is demand for continuos growth. In addition, the ambition level and the experiences of the entrepreneur have a great impact to the internationalisation

• The main success factors in internationalisation of Finnish digital media companies is the utilisation of business relationships across borders

• The main internationalisation operation channel for digital media companies is leveraging the existing customer relationships

Professional service with high growth potential.Success depends on the reaction time and customer relationships.

• Digital media business is by its birth very global and the companies operating in the industry carry heavy service and know-how export potential.

• The Finnish digital media industry is already in some markets in "late starter" situation. On the other hand the companies are able to arise to be "international among others" by own actions and by technological advancement.

• The success of the industry is heavily dependant the companies' capability to meet the requirements of the customers and leverage its existing customer relationships

Alliances crossing industry barriers bring access to additional resources.

• Product innovation in the industry requires flexible coalitions crossing traditional industry barriers. The number of these will grow with technological advancements.

• The main resource shortage for the Finnish digital media companies' internationalisation is the lack of skilled personnel.

• Financial capital is available in the markets. Yet, the Finnish companies are not experienced to work with external financiers and high growth requirements

The way forward

• At LTT-Research/Helsinki School of Economics we will continue to analyse the digital media industry

– from industry development perspective– from financial analysis perspective– from convergence perspective– from internationalisation perspective

• We have follow-up data of the Finnish companies from 1996 onwards– Surveys and interviews in 1996, 1998, 2000 and 2002 (ongoing)

• Possible co-operation areas– Comparitive studies between counties– Internationalisation analyses– Service business success factor identification and analyses– Analyses on convergence and its implications

For more information

Tommi [email protected]

Useful web sites and publications:http://www.culminatum.fi/uusmedia.htmlhttp://www.uiah.fi/mediastudioverkko/tutkimus.htmlhttp://www.hkkk.fi/ltthttp://www.mol.fi/esf/ennakointi/raportit/uusmedia.pdfhttp://www.tukkk.fi/media/

Convergence (lähentymiskehitys)- what is that?

To Converge=

1) Come together or towards the same point, or2) Approach from different directions

Source: Oxford Dictionary for Business, 1998

Convergence=1) The ability of different network platforms to carry essentially similar kinds of services, or2) the coming together of consumer devices such as the telephone, television and personal computer

Source: European Union, 1997

internationalisation of digital media companies

Business

tampere internationalisation

international activities

industry client surveys

international integration

international operations

international extension

point oy tatu kuivalahti

experiences background