Conceptual  Design of a Global Audit to Improve the International Competitiveness of SMEs  

  - II -  

6.  Theoretical Background of the Checklist Criteria  67

6.1.  Corporate Vision  68

6.2.  The Entrepreneur of Small and Medium Enterprises  69

6.2.1.  Personality of the Entrepreneur  69

6.2.2.  Attitude towards Internationalization  70

6.2.3.  Management Skills  70

6.3.  Corporate Culture as Object of Investigation  72

6.3.1.  Values and Norms within the Company  76

6.3.2.  The Functions of Corporate Culture  80

6.3.3.  The Influences on Organizational Structures  

and  Processes  86

6.3.4.  Corporate Culture in Connection with Leadership  89

6.4.  Resources of the Company  91

6.4.1.  Know-how  91

6.4.2.  Personnel Resources  92

6.4.3.  Financial Resources  92

6.4.4.  Production Equipment  93

6.5.  Personnel Affairs in Relation to the Internationalization  

of  SMEs  94

6.5.1.  Special Features of International Human Resource  

Management   95

6.5.2.  Personnel Recruitment and Selection  98

6.5.3.  Personnel Development  107

6.5.4.  Compensation Policy  113

6.5.5.  Leadership  114

6.6.  Products  115

6.6.1.  International Product Policy  116

6.6.2.  International Price and Condition Policy  119

6.6.3.  International Communication Policy  120

6.6.4.  International Distribution Policy  121

6.6.5.  Goods Category  122

Conceptual  Design of a Global Audit to Improve the International Competitiveness of SMEs  

  - III -  

6.7.  Corporate Strategy  123

6.7.1.  Selection of Countries and Market Segments  125

6.7.2.  Market Entry and Development Strategies  126

6.7.2.1.  Export  128

6.7.2.2.  Licensing  133

6.7.2.3.  Franchising  134

6.7.2.4.  Contract Manufacturing  135

6.7.2.5.  Joint Venture  136

6.7.2.6.  Strategic Alliances  139

6.7.2.7.  Subsidiary Companies  140

6.7.3.  Timing Strategies  142

6.8.  Organizational Structure  144

6.8.1.  Unspecific Form of Organization  148

6.8.2.  Differentiated or Segregated Forms of Organization  149

6.8.3.  Integrated Forms of Organization  151

6.8.3.1.  One-Dimensional Models  151

6.8.3.2.  Multidimensional Models  153

6.9.  Infrastructure of the Company  154

6.10.  Value Chain  154

6.10.1.  Procurement  156

6.10.2.  Technology Development  157

6.10.3.  Operations  157

6.11.  Corporate Identity  158

6.11.1.  Corporate Communication as Object of Investigation  159

6.11.1.1.  The Tasks of Corporate Communication  162

6.11.1.2.  Corporate Communication in Practice  165

6.11.1.3.  Instruments of Corporate Communication  166

6.11.2.  Corporate Behavior  169

6.11.3.  Corporate Design  170

6.11.4.  Corporate Mission  171

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  - IV -  

6.12.  Corporate Relations  171

6.12.1.  Company Networks  171

6.12.2.  Contacts to socio-cultural Interest Groups  173

6.13.  Information Systems  175

7.  Development of the Questionnaire Model for the Practical  

Implementation  of the As-Is Analysis  175

7.1.  Compilation of the List of Questions  176

7.2.  Weighting of the Criteria and Questions  176

7.3.  Development of the Calculation Model  178

7.4.  The Excel Document for the Implementation of the  

Questionnaire   181

7.5.  Evaluation of the Final Result  181

7.5.1.  A Final Result between 0 and 333 points  182

7.5.2.  A Final Result between 334 and 666 points  183

7.5.3.  A Final Result between 667 and 1000 points  184

8.  Reasons for and Benefits from the Participation in the  

Global  Audit  184

9.  Problems with the Global Audit  185

9.1.  Problems during the Development of the Global Audit  186

9.2.  Expected Problems during the Stage of Implementation of the  

Global  Audit  187

10.  Recommendation for Action and Conclusion  188

List  of References  VIII

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - V - Listof Abbreviations

BGB Bürgerliches Gesetzbuch BS British Standard CC Corporate Culture CD Corporate Design CEO Chief Executive Officer CI Corporate Identity CI Corporate Identity CR Corporate Relations CS Corporate Strategy CV Corporate Vision DIN Deutsche Institut für Normung e.V. E Entrepreneur E.g. Exempli Gratia E-Business Electronic Business EC European Community E-Commerce Electronic Commerce EEC European Economic Community EFTA European Free Trade Association E-Mail Electronic Mail EMAS Eco-Management and Audit Scheme EMU European Economic and Monetary Union Et al. u.a. Etc. Et Cetera EU European Union Fig. Figure GATT General Agreement on Tariffs and Trade GmbH Gesellschaft mit beschränkter Haftung HCNs Host Country Nationals HRM Human Resource Management I.e. Id est IC Infrastructure of the Company IfM Institut für Mittelstandsforschung

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - VI - IMF International Monetary Fund INCOTERMS International Commercial Terms IS Information Systems ISO International Organization for Standardization KF Key Figure NAFTA North American Free Trade Agreement OECD Organization for Economic Co-operation and Development OS Organizational Structure P Personnel PCNs Parent Country Nationals PR Products PR Public Relations Q.v. Quod Vide R&D Research and Development RC Resources of the Company SMEs Small and Medium Enterprises SMS Short Message Service TCNs Third Country Nationals TV Television USA United States of America VC Value Chain

Conceptual  Design of a Global Audit to Improve the International Competitiveness of SMEs  

  - VII -  

Table of  Figures  

Figure  1: Structure of the Diploma Thesis  

Figure  2: Promotive Factors for Globalization  

Figure  3: Development of World Export  

Figure  4: German Export from 1990 to 2003  

Figure  5: German Import from 1990 to 2003  

Figure  6: Quantitative Definition of SMEs (IFM Bonn)  

Figure  7: Quantitative Definition of SMEs (EU)  

Figure  8: Qualitative Characteristics of SMEs  

Figure  9: Typical Strengths and Weaknesses of SMEs  

Figure  10: Typical Benefit of Environmental Management  

for  the Entrepreneur  

Figure  11: Steps up to the first Certification according to the Community  

Eco  -Management and Audit Scheme  

Figure  12: The Management Audit Instruments  

Figure  13: The Management Audit Procedure  

Figure  14: The Procedure of the Auditing Process  

Figure  15: Value oriented Types of Entrepreneurs  

Figure  16 : Levels of Corporate Culture  

Figure  17: Categories of Success Attributes  

Figure  18: Central Market Entry and Market Development Strategies  

Figure  19: Systematization of Market Entry and Market Development  

Strategies  according to Meissner/Gerber (1980)  

Figure  20: Basic Forms of International Organizational Structures  

Figure  21: International Division  

Figure  22: Porter’s Value Chain  

Figure  23: Screenshot of the Rating Sheet  

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 1 -

1.Introduction

1.1. Formulation of the Problem

“We live in a time that is characterized by an increasing globalization and internationalization. We cannot and should not elude of it.” 1

“All business today is global. Those individual businesses, firms, industries, and whole societies that clearly understand the new rules of doing business in a world economy will prosper; those that do not will perish.” 2

The process of globalization has extremely proceeded in the last decades. There is no other term that controls the actual discussion in policy and economy in this enormous extend, like globalization does. 3

A few years ago the term of globalization was nearly unknown. Meanwhile it is omnipresent. In 1980 the term “globalization” hit the headlines in only fifty publications of all popular business magazines; in 1990 already six hundred seventy entries were found. 4

Nowadays it is to state, that globalization is not an invention of the 20 ^th century. In the strict sense even the Babylonians, Phoenicians, Egyptians, Greek, and Romans practiced globalization to explore faster and cheaper trade routes. Today, in the 21 ^st century, the process of globalization is still continuous. For the future it is probable that the highest growth rates will be reached outside of our local markets any longer. 5

At no time before globalization has reached the present extent. Current technological, economical, and political developments in form of new transport-, information-, and communication-technologies, deregulated capital and goods

¹ HERING, E.; PFÖRTSCH, W.; WORDELMANN, P.: Internationalisierung des Mittelstandes - Strategien zur internationalen Qualifizierung in kleinen und mittleren Unternehmen, Bielefeld 2001, p. 5.

² DHINGRA, H. L.: Globalization of SMEs through Strategic Alliances, in: ASEAN Economic Bulletin, Vol. 8, No. 1, p. 47.

³ Cp. LÖSER, B.: Internationalisierung mittelständischer Produktionsunternehmen durch strategische Netzwerke, Aachen 2000, p. 1.

⁴ Cp. MÜLLER, S.; KORNMEIER, M.: Globalisierung als Herausforderung für den Standort Deutschland, [www.bpb.de/publikationen/], (Erstelldatum: 2001; Verfügbarkeitsdatum: 15. September 2004), p. 1.

⁵ Cp. RICHERT, R.; HERBERT, M.; ZICKERT, K.: Internationalisierung kleiner und mittelständischer Unternehmen in Südthüringen, Berlin 2002, p. 4.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 2 -

markets,as well as an increasing loss of importance of national borders in politics and society led to the situation that a global exchange takes place. ⁶ As a result competition not only occurs between German suppliers on the German markets, but also on the European and World markets.

Consequently a lot of enterprises are under the pressure of internationalization. That is why the necessity of increasing offshore presence becomes apparent. More and more companies are forced to face up the challenges of international markets. ⁷ Today no successful company is on the one hand able to ignore the competition on the domestic market out of aspiring regions and on the other hand able to disregard the chances of emerging markets worldwide. 8

“Globalization is like Muhammad Ali’s right fist:

You can run, but you cannot hide.” 9

The sustained changes of goods and capital markets through increasing liberalization and networking require market strategies by the companies, which transcend the border of the local markets and contain an international context. ¹⁰ Only a few phenomena are afflicted with so many chances and risks like globalization at the same time. On the one hand the opportunities through internationalization and globalization became indeed greater, but on the other hand companies are simultaneously forced, in consequence of the increasing stress of competition, to use these possibilities in form of opening up new sales markets abroad. 11

Nearly every company of all countries, branches and magnitudes is concerned by the phenomenon of globalization and internationalization. Day-to-day newspapers report that companies source out parts of their production in countries with low salary levels, that companies go into strategic alliances with foreign partners, or

⁶ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 1.

⁷ Cp. RICHERT, R.; HERBERT, M.; ZICKERT, K.: Internationalisierung kleiner und mittelständischer Unternehmen in Südthüringen, Berlin 2002, p. 4.

⁸ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 2.

⁹ AGMON, T.; DROBNICK, R.: Small Firms in Global Competition, New York 1994, p. 1.

¹⁰ Cp. KOKALJ, L.; WOLFF, K.: Die internationale Wirtschafttätigkeit kleiner und mittlerer Unternehmen im Lichte der amtlichen und nicht-amtlichen Statistik, Bonn 2001, p. 1.

¹¹ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 1.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 3 -

thatthey expand the distribution of their products to countries with higher growth potentials. 12

In this context it is very surprising, that almost exclusively the offshore activities of big enterprises attract interest in the media, because SMEs (Small and medium enterprises) play a larger role in the economy than it is often realized. SMEs constitute 99% of the taxable companies in Germany. They offer 80% of all apprenticeship places, employ 64% of all employees, and produce 52% of the gross added value. ¹³ For that reason the medium-sized businesses are consequentially regarded as the “backbone of the German economy”. ¹⁴ In spite of everything the German SMEs are participated far below average concerning international activities at the moment. Thus the strength of the medium-sized businesses is momentarily only insufficient reflected in the foreign trade and payments. 15

However, according to the investigation of the German Industry and Trading Day, the share of the offshore business in total turnover of SMEs will nearly double in the next years. ¹⁶ A current survey of the consultancy Roland Berger reveals that particularly the small and medium enterprises are on the cusp of internationalization. According to the survey 71 percent of German SMEs plan to produce abroad within the next five years. 17

Therefore the development of foreign markets is no longer an exclusive domain of large-scale enterprises. ¹⁸ Nowadays international business activities are also important and essential parts of the business policy of small and medium enterprises. These activities conduce to the attainment of business objectives, such as sustainment of competitiveness. 19

¹² Cp. WELGE, M. K.; HOLTBRÜGGE, D.: Internationales Management, Landsberg 2001, p. 11.

¹³ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

¹⁴ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 4.

¹⁵ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 2.

¹⁶ Ibid.

¹⁷ Cp. O.V.: Firmen wollen immer mehr Produktion ins Ausland verlagern, in: Die Welt, 16. August 2004.

¹⁸ Cp. WEBER, P. : Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, p. 1.

¹⁹ Cp. NIENABER, K. B.: Internationalisierung mittelständischer Unternehmen, Diss., Hamburg 2003, p. 1.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 4 -

Inconsideration of the fact it is exceedingly alarming that the international engagement of Germans’ Small and Medium Enterprises often ends at the European borders or that it is at best extended to the United States of America. Up to now SMEs have only paid attention to mature markets (“Cash-Cows”). Remote, but important growth markets (“Stars”) of the future, like Asia or South America, have been carelessly neglected so far. ²⁰ Nevertheless the problems and scopes for design of international operating companies are very different. While many SMEs are still at the beginning of their internationalization process, large enterprises pass incrementally into a worldwide integration of their internal and external engagements. ²¹ In former times, bef/re globalization of markets and industries emerged, national markets were segmented. On the one hand there were large-scale enterprises which competed mostly at international markets and on the other hand there were smaller businesses that remained local or regional. The trade procedure with foreign countries was a cost-intensive and complex process and consequently it was only realistic for large enterprises.

Due to the changes of the global competitive environment prior barriers, which segmented the national and international markets and therewith separated small and large firms’ competitive space in the recent past, were removed by globalization. ²² Thus globalization does not only affect large companies, but also small and medium enterprises. 23

“There is a role for smaller firms at international markets. It is just that the opportunities for smaller firms are different from those for larger, multinational firms.” 24

Up to now, the German SMEs have only reacted insufficiently on the globalization of the world’s economy. Offshore activities are only carried out prevalently as a

²⁰ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 3.

²¹ Cp. WELGE, M. K.; HOLTBRÜGGE, D.: Internationales Management, Landsberg 2001, p. 11.

²² Cp. ETEMAD, H.: Internationalization of small and medium-sized Enterprises: A grounded theoretical Framework and an Overview, in: Canadian Journal of Administrative Sciences, p. 1.

²³ Cp. NIENABER, K. B.: Internationalisierung mittelständischer Unternehmen, Diss., Hamburg 2003, p. 1.

²⁴ DHINGRA, H. L.: Globalization of SMEs through Strategic Alliances, in: ASEAN Economic Bulletin, Vol. 8, No. 1, p. 47.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 5 -

reactioninstead of an own impulse. ²⁵ A long time the German-speaking market has been satisfactory for small and medium enterprises and that is why nobody saw a reason for dealing with the difficulties of internationalization. ²⁶ Different studies act on the assumption that approximately 400.000 of circa 3.000.000 medium-sized enterprises (13 %) are internationally active. Due to the fact that these activities are only restricted to export by the majority, only a fractional amount of German SMEs is, according to the OECD internationalization index, considered as “fully globalized”. ²⁷ Many SMEs are still dependent on only one large customer on home soil. 28

Experts agree on the fact, that an exclusive concentration on the local market for SMEs is more and more inadequate to ensure the lasting existence of the company on the market. 29

Companies, which are momentarily active, exclusively on national or European markets, have to dare the strategic step into the wide world to be successful in the future. 30

In comparison to many other countries in the world, the German market only generated low growth rates in the last years. ³¹ Declining respectively stagnating local markets characterize the image of nearly all branches in Germany. Thus it will be indispensable for numerous SMEs to open up new selling markets worldwide in the close future, to balance the losses on the domestic markets. ³² More and more SMEs intend to secure their domestic business through additional foreign operations. 33

²⁵ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 5.

²⁶ Cp. RICHTER, M.: Warum müssen KMU global denken?, in: Vertrieb und Marketing international, [http://www.webagency.de/infopool/mittelstand/globaldenken.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

²⁷ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 3.

²⁸ Cp. RICHERT, R.; HERBERT, M.; ZICKERT, K.: Internationalisierung kleiner und mittelständischer Unternehmen in Südthüringen, Berlin 2002, p. 5.

²⁹ Cp. KOKALJ, L.; WOLFF, K.: Die internationale Wirtschafttätigkeit kleiner und mittlerer Unternehmen im Lichte der amtlichen und nicht-amtlichen Statistik, Bonn 2001, p. 1.

³⁰ Cp. SPÄTH, L.: Geleitwort, in: BERNDT, R. (Hrsg.): Global Management, Berlin 1996, p. 1.

³¹ Ibid.

³² Cp. SCHENK, S.: Internationalisierung des Geschäfts - Für den Mittelstand oft leichter gesagt als getan, [http://www.absatzwirtschaft.de/], (Erstelldatum: 24. Februar 2003; Verfügbarkeitsdatum: 07. September 2004), p. 1.

³³ Cp. LÖSER, B.: Internationalisierung mittelständischer Produktionsunternehmen durch strategische Netzwerke, Aachen 2000, p. 2.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 6 -

Inaddition to the aspect of a secure existence, the enormous profit and growth potential, which can be reached through an international engagement, plays a decisive role. 34

Therefore an offensive internationalization and a globalization of the corporate policy are regarded as the success factors of the future. ³⁵ Although the participation of small and medium enterprises in international business activities seems to be indispensable, the opening up of foreign markets could be an existence-decisive factor for medium-sized businesses. ³⁶ SMEs are absolutely disadvantaged in connection with foreign operations compared with large firms, because they do not possess own staff positions that are able to devise an international concept. 37

In the long lasting discussion about the desiderative offshore engagement of German medium-sized businesses a lot of reasons have been mentioned, such as a conservative, risk averse, as well as on short term success concentrated tenor of entrepreneurs, who still regard globalization rather as a threat than a chance, or a lack of management and financial resources. 38

1.2. Objective and Structure of the Diploma Thesis

The behavior of internationalization of companies was subject of various scientific studies especially in the last years. A lot of these studies about internationalization were almost limited exclusively to large-scale enterprises. ³⁹ Consequently, in general a significant deficiency in researches about mediumsized businesses can be found. ⁴⁰ The existing studies do not take the specifics of

³⁴ Cp. BERNDT, R.; ALTOBELLI, C. F.; SANDER, M.: Internationales Marketing Management, Berlin 2003, p. 1.

³⁵ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 1.

³⁶ Cp. KOKALJ, L.; WOLFF, K.: Die internationale Wirtschafttätigkeit kleiner und mittlerer Unternehmen im Lichte der amtlichen und nicht-amtlichen Statistik, Bonn 2001, p. 1.

³⁷ Cp. NIENABER, K. B.: Internationalisierung mittelständischer Unternehmen, Diss., Hamburg 2003, p. 1.

³⁸ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 4.

³⁹ Cp. RICHERT, R.; HERBERT, M.; ZICKERT, K.: Internationalisierung kleiner und mittelständischer Unternehmen in Südthüringen, Berlin 2002, p. 4.

⁴⁰ Cp. BEUTEL, R.: Unternehmensstrategien international tätiger mittelständischer Unternehmen, Frankfurt a.M. 1988, pp. 5-7.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 7 -

smalland medium enterprises and consequential effects on the process of internationalization in a sufficient degree into consideration. ⁴¹ Large-scale enterprises already have own divisions that exclusively deal with international affairs, whereas medium-sized businesses are particularly dependent on available recommendations for action of the science, to cope with the requirements of globalization. 42

For this reason we decided to narrow our diploma thesis down to medium-sized enterprises that are still internationally active or that plan to start an international engagement.

Medium-sized businesses have to meet the challenge of developing an international strategy that on the one hand keeps their strengths and on the other hand reduces their weaknesses. 43

With our diploma thesis “Conceptual Design of a Global Audit to improve the international Competitiveness of Small and Medium Enterprises” we would like to develop an auditing process for a successful implementation of internationalization. Within the scope of the auditing process it is our objective to compile a checklist, with whose help it should be possible to verify to what extend small and medium enterprises come up to the required conditions for a successful implementation of internationalization. Thus we will particularly focus on the evaluation of the internationalization ability of medium-sized enterprises. Moreover small and medium enterprises should be in the position to identify their strengths and weaknesses and to eliminate their weaknesses on the basis of our Global Audit.

Finally, at the end of the Global Audit, it is our aim to make a certification possible. Subsequently to this introduction, chapter two initially conduces to the determination of the conceptual basis. Thereby the central terms “Globalization and Internationalization”, “Medium-sized Businesses”, as well as the term “Audit” will be described in detail as a general basis for further analysis of our diploma thesis.

⁴¹ Cp. BEUTEL, R.: Unternehmensstrategien international tätiger mittelständischer Unternehmen, Frankfurt a.M. 1988, pp. 5-7.

⁴² Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 5.

⁴³ Cp. LÖSER, B.: Internationalisierung mittelständischer Produktionsunternehmen durch strategische Netzwerke, Aachen 2000, p. 2.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 8 -

Thethird chapter deals with the presentation of different examples of already existing audits in practice. In the fist instance we will bring out the different attributes of each existing audit. In this context we will also analyze whether these attributes could be useful or rather transferable for the achievement of our objective to design an own Global Audit.

In the fourth chapter, which could be seen as the main focus of our diploma thesis, we will start the development process of the Global Audit for the first time. First of all we will compile an own definition of the term “Global Audit”. Thereupon we will decide on the procedure of the auditing process.

The fifth chapter comprises the second step of the auditing process, namely the procedure of the analysis and evaluation of the current status. The as-is-analysis is the core of our workout, because we will compile an own checklist to verify to what extend small and medium enterprises come up to the required conditions for a successful internationalization.

In the following we will explicitly explain the main criteria of the checklist on the basis of a theoretical background in chapter six. The theoretical background should provide a basis for the formulation of the detailed questions as well as the weighting of the criteria and questions.

In the seventh chapter we will present the development of the questionnaire model for the practical implementation of the as-is analysis. First of all, based on the theoretical background we will compile a list of questions for the evaluation of the particular criteria of the checklist. Thereupon we will weight the criteria as well as the questions of the checklist relating to their importance for a successful implementation of internationalization according to our opinion. Subsequently we will describe the development of the calculation model and in addition to that we will devise a computer-based rating sheet.

The eights chapter brings out the reasons for the participation in the Global Audit as well as the benefits for small and medium enterprises. Consequently chapter nine deals with the problems of the Global Audit relating to the development and implementation of the Global Audit. At the end we will give some recommendations for action and we will draw a conclusion of our diploma thesis (Q.v. Fig. 1).

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 9 -

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 10 -

Figure1: Structure of the Diploma Thesis

Source: Own illustration.

2. Conceptual Basis

In this chapter the central terms “Globalization and Internationalization”, “Medium-sized businesses”, as well as the term “Audit” will firstly be defined as the basis for further analysis.

2.1. Globalization and Internationalization

The time after the Second World War is characterized by an increasing internationalization of economic activities. Keywords like “Globalization”, “Internationalization” and “Multinational Companies” indicate the development process, which pose a new challenge for the corporate management. ⁴⁴ Nowadays it is typical and necessary to replace national approaches with global management concepts. 45

The today’s determining factors of businesses have changed permanently. The economic areas are getting gradually larger, tariff barriers abolish, world brands gain an increasing relevance, the mobility of people grows, supranational target groups emerge, and supranational media spread. International trade has

⁴⁴ Cp. PERLITZ, M.: Internationales Management, Stuttgart 2000, p. 1.

⁴⁵ Cp. BERNDT, R.: Global Management, Berlin 1996, p. 1.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 11 -

increaseddramatically, and foreign direct investments have proliferated. Traded goods, money, information, labor, and services have all leapt over national boundaries and markets. Domestic suppliers, who had enjoyed the luxury of a highly protected home market for a long time, find themselves facing direct competition from foreign-owned, much larger, multinational enterprises. ⁴⁶ In this context the term “Multinational Firms” comprises in general companies that economically operate in more than one country. 47

Although the buzzword “Globalization” resounds throughout the land and stamps the current economic and political discussion like hardly any other one, this term is only rarely defined explicitly. 48

A lot of economic lexica did not have an entry about globalization for a long time, e.g. Gabler’s Wirtschaftslexikon firstly mentioned the term globalization in its 13 ^th edition in 1992. Kröners Wörterbuch der Wirtschaft of 1995 still had no entry about this topic. ⁴⁹ The number of publications dealing with globalization has jumped up particularly since 1993. 50

Due to the fact that the term “Globalization” is very wide, it is not surprising, that there is no general accepted definition in literature. ⁵¹ Nevertheless many attempts to define this phenomenon were carried out. Hence in literature no agreement is reached whether the terms globalization and internationalization have the same meaning or not. That is why both words are nearly used synonym in the majority of cases. The prevailing opinion regards globalization as a particularly strong specification of internationalization. 52

To define the term globalization it is necessary to trace back to the Latin roots (globus = globe, earth). Thus globalization is a matter of phenomenon that is of worldwide dimension. 53

⁴⁶ Cp. AHARONI, Y.: How Small Firms Can Achieve Competitive Advantage in an Interdependent World, in: AGMON, T. (Hrsg.): Small Firms in Global Competition, New York 1994, p. 9.

⁴⁷ Cp. BEUTEL, R.: Unternehmensstrategien international tätiger mittelständischer Unternehmen, Frankfurt a.M. 1988, p. 2.

⁴⁸ Cp. WELGE, M. K.; HOLTBRÜGGE, D.: Internationales Management, Landsberg 2001, p. 35.

⁴⁹ Cp. GRÜSKE, K.-D.; RECKTENWALD, H. C.: Wörterbuch der Wirtschaft, Stuttgart 1995.

⁵⁰ Cp. KUTSCHKER, M.; SCHMID, S.: Internationales Management, München 2004, p. 153.

⁵¹ Cp. FIETEN, R.; FRIEDRICH, W.; LAGEMAN, B.: Globalisierung der Märkte - Herausforderung und Optionen für kleine und mittlere Unternehmen, insbesondere für Zulieferer, Bonn 1997, p. 9.

⁵² Cp. KUTSCHKER, M.; SCHMID, S.: Internationales Management, München 2004, p. 153.

⁵³ Ibid.

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Oneof the most common encyclopedias in Germany, the Gabler

Wirtschaftslexikon, defines globalization as the form of the international strategy of a transnational company, whereby competitive advantages should be built up through utilization of advantages of location and realization of economies of scale. 54

In compliance with Meyer the term globalization specifies the increasing international integration at political, economic, and social level. ⁵⁵ According to Niehoff and Reitz the word internationalization in general describes the increase of transborder economic integrations, whereby globalization represents a further enhancement of internationalization. Beyond it is to mention that globalization on the one hand is regarded as a status and on the other hand as a process of increasing integration. Therefore dependencies of different countries and economic subjects emerge. ⁵⁶ Pursuant to Hilger the popular and well known term of internationalization signifies the fact, that companies act beyond the borders of their national domestic market, in which their head office is situated, or that they expand their consisting foreign engagement. 57

Additionally, according to Gosalia, it involves the rapid expansion of markets, multinational operations, the exchange of qualified personnel, and cultural interaction. With the Latin prefix “inter-” the thought of frontier crossing and frontier overcoming is expressed. 58

The variety of definitions points out that globalization cannot be summarized in a standardized definition.

However, it is to realize that globalization or rather internationalization concerns individuals, groups, enterprises, organizations, and states. Because of the relevance of the topic the daily and weekly press regularly deals with the subject of economic internationalization. 59

⁵⁴ Cp. ARENTZEN, U.: Globalisierung, in: Gabler Wirtschaftslexikon, Wiesbaden 1997.

⁵⁵ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 1.

⁵⁶ Cp. NIEHOFF, W.; REITZ, G.: Going Global - Strategien, Methoden und Techniken des Auslandsgeschäfts, Berlin 2001, p. 7.

⁵⁷ Cp. HILGER, A.: Erfolgsfaktoren für Internationalisierungsstrategien - Dargestellt am Beispiel des Engagements deutscher Unternehmen in der VR China, Frankfurt a.M. et al. 2001, p. 10.

⁵⁸ Cp. GOSALIA, A.: Interkulturelles Management chinesisch-deutscher Joint Ventures, Göttingen 2001, p. 13.

⁵⁹ Cp. KUTSCHKER, M.; SCHMID, S.: Internationales Management, München 2004, pp. 3f.

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Crossnational activities bring out a necessity for many companies to reach the predetermined growth targets, to ensure the ability to compete and to secure the existence of the company in the long run.

The linking-up of economics is encouraged for example through the build-up of economic and monetary unions (e.g. EMU), decreasing trading tolls, the build-up of free trade zones (e.g. NAFTA, EFTA), higher mobility of the market participants, as well as through new communication media like satellite TV and the internet. ⁶⁰ In literature a multiplicity of driving powers for globalization are mentioned. Political, technological, and economical changes belong to the fundamental driving powers for the increasing internationalization of SMEs. Out of these data we compiled an own list of the most important and prevalent aspects that promote the process of globalization (Q.v. Fig. 2).

⁶⁰ Cp. BERNDT, R.; ALTOBELLI, C. F.; SANDER, M.: Internationales Marketing Management, Berlin 2003, p. 1.

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Figure2: Promotive Factors for Globalization

Source: Own illustration according to WELGE, M. K.; HOLTBRÜGGE, D. (2001); PERLITZ, M. (2000); NIEHOFF, W.; REITZ, G. (2001); JAKOBSEN, L.; DE VOSS, V. (2003); FIETEN, R. (1997); ERNST, D. (1999); AHARONI, Y. (1994); OPPENLÄNDER, K.-H. (1997).

The world trade, which is an indicator for the importance of the international business activity, has increased nearly by a factor of 8 from 1975 to 2000 (Q.v. Fig. 3).

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Figure3: Development of World Export

Source: According to BERNDT, R.; ALTOBELLI, C. F.; SANDER, M. (2003), p. 2.

Germany has ranked concerning the import as well as the export activities second position for years. ⁶¹ Experts act on the assumption that in the year 2003 Germany replaced the USA from the top of the export ranking list. According to estimations on the basis of data of the International Monetary Fund (IMF) the German share in the global export is by 10,2% and therewith above the 9,9% of the USA. ⁶² Figures 4 and 5 definitely point out that the exports always exceed the imports in recent years.

⁶¹ Cp. BERNDT, R.; ALTOBELLI, C. F.; SANDER, M.: Internationales Marketing Management, Berlin 2003, p. 1.

⁶² Cp. GRÖMLING, M.: Zur Weltmarktposition der deutschen Wirtschaft, in: IW-Trends, Köln 2003, p. 1.

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ThusGermany is deservedly considered as the world champion of export activities. 63

Germans’ import and export activities have increased from 1990 to 2003 above 80% (Q.v. Fig. 4 and 5).

Figure 4: German Export from 1990 to 2003

Source: According to BERNDT, R.; ALTOBELLI, C. F.; SANDER, M. (2003), p. 3.

Figure 5: German Import from 1990 to 2003

Source: According to BERNDT, R.; ALTOBELLI, C. F.; SANDER, M. (2003), p. 3.

⁶³ Cp. KUTSCHKER, M.; SCHMID, S.: Internationales Management, München 2004, p. 51.

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Internationalizationor rather globalization is no longer the sole domain of large corporations. Especially the increasing competitive pressure gives SMEs the cause to consider activity on international markets for the security or improvement of their competitive positions.

“There may, of course, still be medium-sized companies today that realize and only expand competitive advantages in nationally-oriented sectors and do not consider internationalization. In view of corporate-environmental and competitive dynamics, however, these companies could probably be the candidates for internationalization of tomorrow.” 64

For this reason, it will become increasingly important for many small and medium enterprises to intensify their activity on the international level and to expand their sales activities to foreign markets. Meanwhile even these companies need to have knowledge about the treatment of foreign markets.

2.2. Medium-sized Businesses

The term of “Medium-sized businesses” has been discussed in many cases. In general the medium-sized businesses are related to small and medium Enterprises (SMEs). 65

The reason for the choice of small and medium enterprises as objective of investigation results from the great importance of the medium-sized businesses for the German economy. Very important is the fact, that these smaller organizations are creating the new employment opportunities, not their bigger, better-known counterparts. ⁶⁶ Consequently the medium-sized businesses are regarded as the “backbone of the German economy”. 67

⁶⁴ SACHSE, U.: Internationalisation of Medium-sized Enterprises, Sternenfels 2002, p. 13.

⁶⁵ Cp. NIENABER, K. B.: Internationalisierung mittelständischer Unternehmen, Diss., Hamburg 2003, pp. 14f.

⁶⁶ Cp. AHARONI, Y.: How Small Firms Can Achieve Competitive Advantage in an Interdependent World, in: AGMON, T. (Hrsg.): Small Firms in Global Competition, New York 1994, p. 9.

⁶⁷ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 4.

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Dueto their relevance from the view of managerial economics, understanding small and medium enterprises is of particular importance in Germany. For this reason, in the context of our diploma thesis it is indispensable to dwell on the term “Small and Medium Enterprises”.

The medium-sized businesses, as object of investigation, are extremely wide and heterogeneous. ⁶⁸ Hence it is impossible to find out a general accepted definition in technical literature, although a multitude of attempts was carried out. ⁶⁹ Nevertheless for economic analyses it is essential to structure the stock of enterprises into size classes. 70

A long time ago Ludwig Erhard, former German Chancellor and influential Minister of Economics, once described the importance of the “Mittelstand”. From his point of view a definition of the “Mittelstand” cannot be restricted to the value of its assets, the amount of its turnover or the number of its employees.

“Deriving the “Mittelstand’s” significance only from statistics would lead into the wrong direction because it neglects that the “Mittelstand” is also characterized by its basic convictions and attitudes in the socio-economic and political process.” 71

Therefore the German term “Mittelstand” comprises economic aspects as well as social and psychological principles. It includes on the one hand quantitative and on the other hand qualitative features. 72

First of all we will bring out the quantitative data to classify the medium-sized businesses by numbers. Subsequently we will discuss the typical qualitative characteristics. In the end we intend to derive the resulting strengths and weaknesses of small and medium enterprises, which could be a decisive factor for the ability to start foreign operations.

⁶⁸ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 10.

⁶⁹ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 56.

⁷⁰ Cp. INSTITUT FÜR MITTELSTANDSFORSCHUNG BONN: Mittelstand - Definition and Key Figures, Bonn 2004, p. 1.

⁷¹ HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, p. 1.

⁷² Cp. HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, p. 1.

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2.2.1.Quantitative Characteristics

To define a medium-sized enterprise, the size of the company and quantitative criteria are primarily used. 73

The size structure is usually described by referring to quantitative criteria in the form of input-oriented and output-oriented characteristics, like the number of employees, the balance sheet total, total capital, annual turnover, profit, and market share. ⁷⁴ The quantitative classification relates to the measurement and determination of the enterprise size. Due to the suitability the number of employees, the annual turnover and the balance sheet total have become accepted as adequate indicators in practice. 75

For this reason the Institute for SME-Research Bonn categorizes all companies with a number of employees from 1 to 499 and an annual turnover up to 50 million Euro as SMEs in general (Q.v. Fig. 6). 76

Figure 6: Quantitative Definition of SMEs (IFM Bonn)

Source: According to the INSTITUT FÜR MITTELSTANDSFORSCHUNG BONN (2004).

This definition of small and medium enterprises is accepted all over Germany and with respect to turnover size classes the Institute for SME-Research Bonn complies with the SME definition applied by the European Union.

⁷³ Cp. SACHSE, U.: Internationalisation of Medium-sized Enterprises, Sternenfels 2002, p. 17.

⁷⁴ Cp. WEBER, P. : Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, p. 7.

⁷⁵ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 56.

⁷⁶ Cp. INSTITUT FÜR MITTELSTANDSFORSCHUNG BONN: Mittelstand - Definition and Key Figures, Bonn 2004, p. 1.

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In2003 the European Commission adopted a new recommendation regarding the SME definition, which replaced the old one. Thus it is used to determine eligibility for both national SME support schemes and EU-wide SME programmes. These changes will apply to January 2005. (Q.v. Fig. 7). 77

Figure 7: Quantitative Definition of SMEs (EU)

Source: According to the EUROPÄISCHE KOMMISSION (2004).

According to the definition of the European Union, a company will be classified as a SME if it does not exceed the predetermined number of employees and the financial threshold values (Annual Turnover and Balance Sheet Total). Furthermore criteria regarding the autonomy of the company are important. To give an example medium-sized enterprises are defined as those having fewer than 250 employees and either an annual turnover not exceeding 50 million Euro or an annual balance sheet total not exceeding 43 million Euro. Small companies have less than 50 employees. The marginal value in respect of the annual turnover amounts up to 10 million Euro and also up to 10 million Euro with regard to the Balance Sheet Total. A company is not classified as a SME, if 25% or more of the capital or the voting rights are controlled directly or indirectly from one or more public corporations of the public law. 78

⁷⁷ Cp. INSTITUT FÜR MITTELSTANDSFORSCHUNG BONN: Mittelstand - Definition and Key Figures, Bonn 2004, p. 1.

⁷⁸ Cp. EUROPÄISCHE UNION: Definition der Kleinstunternehmen sowie der kleinen und mittleren Unternehmen, [http://europa.eu.int/scadplus/printversion/de/lvb/n26026.htm], (Erstelldatum: 23. Mai 2003; Verfügbarkeitsdatum: 13. September 2004), p. 1.

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Supplementaryto this general classification additional sectoral categorizations are conducted. ⁷⁹ The Institute for SME-Research Bonn uses a sector-specific system for classifying enterprises as SMEs. Thereby, enterprises belonging to specific economic sectors are rated as SMEs as long as their turnover does not exceed the usual turnover of the economic sector. 80

The advantage of a quantitative classification results from the simpleness of the ascertainability and objective verifiability of these criteria. ⁸¹ However official statistics often do not provide the necessary data for the definition of SMEs.

In literature the main disadvantage of a quantitative classification is seen in the fact that the character of small and medium enterprises cannot be exclusively ascertained on the basis of numbers. In fact the character of small and medium enterprises exceedingly depends on the particular branch. ⁸² Quantitative criteria are insufficient to make a reliable statement about medium-sized businesses. 83

2.2.2. Qualitative Characteristics

Due to the fact that a definite classification exclusively on the basis of quantitative data seems to be insufficient, it is essential to take the qualitative aspects of small and medium enterprises, such as the identity of enterprise ownership, management and the personal responsibility for the enterprise’s activities, into account. 84

The qualitative classification relates to the economic and social configuration and underscores the character of the company. ⁸⁵ Qualitative criteria require the existence of certain features at the company. ⁸⁶ If a quorum of these qualitative features is fulfilled, a company will normally be classified as a SME.

⁷⁹ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 57.

⁸⁰ Cp. HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, p 4.

⁸¹ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 8.

⁸² Cp. WEBER, P. : Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, p. 9.

⁸³ Cp. LÖSER, B.: Internationalisierung mittelständischer Produktionsunternehmen durch strategische Netzwerke, Aachen 2000, p. 26.

⁸⁴ Cp. MEYER, M.: Emerging Markets - Markteintrittsstrategien für den Mittelstand, Diss., Lohmar 2000, p. 12.

⁸⁵ Cp. BEUTEL, R.: Unternehmensstrategien international tätiger mittelständischer Unternehmen, Frankfurt a.M. 1988, pp. 16-19.

⁸⁶ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 59.

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Ourliterature research has found out that it is impossible to find a standardized list of qualitative characteristics of small and medium enterprises in literature. The existing attempts of classification significantly differ from each other. ⁸⁷ On the basis of our literature workout we have compiled an own list of the most common features (Q.v. Fig. 8).

Figure 8: Qualitative Characteristics of SMEs

Source: Own illustration according to DHINGRA, H. L. (1991); ERNST, D. (1999); KAUFMANN, F.

(1993); MEYER, G. (2000); CICHY, E. U. (1999).

• Strong Linkage between Enterprise and Owner

The central peculiarity of SMEs is a strong linkage between enterprise and owner. Most of the companies are in possession of the family or of a small group of businessmen. ⁸⁸ Hence they are independent in the sense that they are not linked to other firms and groups. It is a matter of legal and economic self-dependent companies. These enterprises are characterized by an identity of ownership and management. 89

⁸⁷ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 59.

⁸⁸ Cp. RICHTER, M.: Warum müssen KMU global denken?, in: Vertrieb und Marketing international, [http://www.webagency.de/infopool/mittelstand/globaldenken.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

⁸⁹ Cp. WEBER, P. : Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, pp. 10f.

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Theresponsibility for the management of the company and all relevant decisions are up to the entrepreneur or rather to the small group of businessmen. ⁹⁰ Thus the entrepreneur assumes personal responsibility for the enterprise’s success or failure and for this reason a personal relationship between employer and employees exists. ⁹¹ The close relationship between the owner and the economic unit strongly influences the market behavior and performance of the company. Moreover the corporate management of small and medium enterprises is notably characterized by the central role of the owner. The close relationship between the owner and the company is reflected in the integration of the economic existence of the owner and the existence of the company. ⁹² Consequently there exists a tight interlocking of family interests and corporate policy. ⁹³ This is an important factor for the right understanding of the “Mittelstand”.

• Personal Management and Organization

The management of SMEs is characterized by the central role of the owner, who can be considered as the pivotal distributing, information, and decision center. ⁹⁴ This peculiarity is reflected in a one direction leadership system, which is steered and controlled by the owner or sometimes with the help of a few executives up into detail. ⁹⁵ Looking at SMEs a flat and centralized hierarchy can be noticed. The outcomes of this are short communication ways, which only cause, in comparison to big enterprises, low information and control costs inside the company. 96

• Low Tolerance for Risk

For the reason that medium-sized entrepreneurs generally are liable with their whole capital or that the company is the only source of income, small and medium companies are often not disposed to take serious risks. In addition to that many

⁹⁰ Cp. KASTL, M.; RÖDl, B.: Going Global - Der Gang mittelständischer Unternehmen an den Weltmarkt, Frankfurt a.M. 2000, p. 11.

⁹¹ Cp. HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, p. 2.

⁹² Cp. HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, pp. 1-2.

⁹³ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

⁹⁴ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 13.

⁹⁵ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 60.

⁹⁶ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 13.

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enterprisersregard their company as a life-task and consider themselves to be associated with the company’s tradition. The company’s tradition insofar plays an important role for the businessmen, that many medium-sized businesses are in family property for generations and the entrepreneurs feel responsible for their family and their workforce. 97

Another approach for the low willingness to take risks is the fact, that mediumsized businesses can be seen as a single profit center. Due to their size, small and medium firms mainly have only one core competency area, which should be secured in any case, because they have no possibilities to balance the risk inside their company. 98

The form of internationalization significantly depends on the subjective attitude and the values of the decision maker, on his offshore orientation, as well as on his personal risk preference and oftentimes less on factual and economic factors. ⁹⁹ As a result of the interlocking between family interests and the corporate policy the chances of foreign engagements are often confronted with the overrated risks and as a consequence these engagements will be cancelled hastily during the planning phase. 100

• Limited Rationality in Decisions

A limited rationality in the decision process is a frequently prevailed attribute of SMEs. As a result of the strong linkage between enterprise and owner, the decision process is characterized through single decisions. Strategic management is rarely to find because of the overload of the management. ¹⁰¹ “The typical small business has no strategy. The typical small business is not “opportunistic”, it is ”problematic” - it lives from problem to problem.” 102

⁹⁷ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 62.

⁹⁸ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 14.

⁹⁹ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 15.

¹⁰⁰ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

¹⁰¹ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 60.

¹⁰² ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 60.

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• DesiderativeManagement and Financial Resources

The size and the capacity of SMEs are still limited by definition. In comparison to big companies the useable potential of capital, personnel, management and knowhow for international activities is restricted. The strategic management and development, as company functions, are oftentimes rarely distinctive and therewith constitute corresponding growth barriers. A broad economic know-how and especially experiences do not exist to recognize and use completely the foreign potentials. Information deficits, desiderative international experiences and missing specialists are typical disadvantages medium-sized businesses have to cope with. 103

A further aspect that complicates a foreign engagement of SMEs is the restricted possibility to get access to financial resources. Financing with outside capital is hardly impossible for medium-sized businesses, because credit institutes are geared to the possession of own capital, the name recognition of the company, and the available loan security. 104

• High Specialization on Core Competencies and Limited Range of Products

With the minor size of small and middle-sized businesses a comparatively small spatial and factual range of products is connected. The products are more specific, specialized, and less diversified than in big enterprises. The core competencies of smaller businesses are disposed closer and more concentrated. A success factor for a lot of SMEs is the creation of niches through specialization and the ensuring of a customer-oriented flexibility at the same time. Oftentimes SMEs fill niches on the market that are widely disregarded by big enterprises in the international context. A particular success factor is the ability to focus the production on the individual demand of the customers, which requires a tight contact with the clients. 105

¹⁰³ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 12.

¹⁰⁴ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 62.

¹⁰⁵ Cp. KAUFMANN, F.: Internationalisierung durch Kooperation - Strategien für mittelständische Unternehmen, Wiesbaden 1993, p. 11.

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• HighlySensitive to Social, Political or Economic Conditions

Because of the local bondage and the restricted size of SMEs, they cannot react to social, political or economic conditions like big enterprises can. As we already mentioned above, SMEs have no scope to cope with changes in their environment, because they mostly have no further subsidiary company that could balance these changes.

All these qualitative criteria have different weighting and they do not need to apply simultaneously. 106

Criticism results from difficulties arising from ascertainment and applicability of such factors. ¹⁰⁷ In certain cases the qualitative criteria dominate the overall enterprise’s activities in such a degree that quantitative aspects such as size or market share lose in importance. Thus even companies employing more than 500 employees can sometimes, from a qualitative perspective, be understood as SMEs. ¹⁰⁸ Consequently the border of affiliation to the medium-sized businesses is fluently. 109

2.2.3. Typical Strengths and Weaknesses of SMEs

Out of these quantitative and qualitative characteristics of small and medium enterprises a lot of strengths and weaknesses, in respect to foreign activities, arise.

As a result of the strong linkage between the owner and the company the management capacities of the entrepreneur are predominantly bound to the every day business. That is why offshore activities, as a long-term strategic option for action, normally do not reach into the decision range of the principal of the firm or rather are considered to be digressive. Moreover modern management methods are rare. 110

¹⁰⁶ Cp. NIENABER, K. B.: Internationalisierung mittelständischer Unternehmen, Diss., Hamburg 2003, p. 16.

¹⁰⁷ Cp. WEBER, P.: Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, p. 11.

¹⁰⁸ Cp. HAUSER, H.-E.: SMEs in Germany - Facts and Figures 2000, Bonn 2000, p. 2.

¹⁰⁹ Cp. WEBER, P.: Internationalisierungsstrategien mittelständischer Unternehmen, Wiesbaden 1997, p. 11.

¹¹⁰ Cp. PETERS, J.: Theoretische Grundlagen der Internationalisierung kleiner und mittlerer Unternehmen, Göttingen 1986, p. 3.

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Amain problem for SMEs consists therein that their executives possess only insufficient knowledge about modern management. 111

Many SMEs, mostly family businesses, which have primarily supplied the regional market since their formation, produce more traditionally instead of efficiently. ¹¹² In addition to that there is a lack of employees with funded knowledge about foreign countries. Particularly these employees are indispensable for carrying out a decision-relevant estimation of risks and chances of new markets. ¹¹³ In the majority of cases no international experienced employee can be found. ¹¹⁴ What is more it could be seen as disadvantageous that SMEs only have a small group of employees. Limited personnel resources are exceedingly impedimental especially for engagements on foreign markets. ¹¹⁵ The weaknesses of small and medium enterprises predominantly arise from the small size of the enterprise. Medium-sized businesses, in comparison to large enterprises, are not able to gain economies of scale. ¹¹⁶ Due to the small output quantity many SMEs are not in the position to supply international markets. Furthermore SMEs are more often exposed to discriminations, such as in the case of support measures of the economic policy. Because of the low quantity demanded, the medium-sized businesses are not in the position to realize favorable prices in the context of purchasing. 117

Moreover SMEs are very limited in the choice of channels of distribution. There is the danger of falling into dependency on powerful costumers, who are able to dictate prices and conditions. 118

¹¹¹ Cp. BEUTEL, R.: Unternehmensstrategien international tätiger mittelständischer Unternehmen, Frankfurt a.M. 1988, p. 3.

¹¹² Cp. AHARONI, Y.: How Small Firms Can Achieve Competitive Advantage in an Interdependent World, in: AGMON, T.; DROBNICK, R. (Hrsg.): Small Firms in Global Competition, New York 1994, p. 9.

¹¹³ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

¹¹⁴ Cp. RICHTER, M.: Warum müssen KMU global denken?, in: Vertrieb und Marketing international, [http://www.webagency.de/infopool/mittelstand/globaldenken.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

¹¹⁵ Cp. PETERS, J.: Theoretische Grundlagen der Internationalisierung kleiner und mittlerer Unternehmen, Göttingen 1986, p. 5.

¹¹⁶ Cp. KRÄMER, W.: Mittelstandsökonomik, München 2003, p. 21.

¹¹⁷ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 68.

¹¹⁸ Ibid.

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Anessential disadvantage for SMEs constitutes the insufficient financial potentials. Many SMEs do not have access to the organized capital market. If they still have access medium-sized businesses will mostly have to pay an interest rate that is two up to five percentage points higher than large enterprises have to compound in practice.

The desiderative availability of capital is more serious. The problem for SMEs with credit institutions is grounded in the fact that these institutions prevalently look more at securities instead of looking at the commercial stock that can emerge through foreign engagements. 119

Personal problems are originated from the problem of succession and the character of the entrepreneur. The chief cause for the insolvency of many SMEs originates from wrong decisions of the entrepreneur. In many cases the enterpriser does not delegate sufficient responsibility to qualified employees. Consequently the entrepreneur is overloaded with his everyday-business and neglects typical management functions as well as fundamental strategic decisions. ¹²⁰ In fact, there are also advantages in being a relatively small firm on today’s international market.

It is not to ignore, that even the flexibility of the company’s management and the personal engagement of one or a few employees in a SME are basically decisive for opening up the possibilities for a successful foreign activity. Fast reactions to changing determining factors, as a result of personal contacts, a flat hierarchy, and thus short decision ways, can be regarded as an advantageous factor for medium-sized businesses. 121

One of the most striking advantages of SMEs is their adaptability and their strength in competition. In contrast large companies are often not in the position to quickly change their business when shifts of the market occur, because too many processes need to be harmonized and too many persons are involved. 122

¹¹⁹ Cp. CICHY, E. U.: Mittelstand und Globalisierung, [http://www.fes.de/fulltext/stabsabteilung/00404toc.htm], (Verfügbarkeitsdatum: 07. September 2004), p. 1.

¹²⁰ Cp. KRÄMER, W.: Mittelstandsökonomik, München 2003, p. 21.

¹²¹ Cp. KRÄMER, W.: Mittelstandsökonomik, München 2003, p. 20.

¹²² Cp. AGMON, T.; DROBNICK, R.: Small Firms in Global Competition, New York 1994, p. 21.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 29 -

Dueto the small enterprise size the transaction costs of SMEs are, in comparison to large enterprises, very low. 123

Oftentimes large companies are not interested in producing individual products that have to be adapted to special consumer needs, whereas some SMEs are specialized in this consumer-oriented production.

The strength of small and medium enterprises is based on the embarking on the niche-strategy. In this way more than 2000 SMEs became to world market leaders or “hidden champions”. ¹²⁴ The aim of this strategy is the agglomeration of the whole business potential and the concentration on core competencies to fulfill optimally the customers’ needs. 125

A further advantage of small and medium-sized businesses is the special relationship to the customers and the integration of the consumer into the production process, whereby product developments result, that are absolutely suitable to the demands. The company tries to find out about the needs and preferences of the customers as quickly as possible.

The customer fulfillments come to the fore. ¹²⁶ With such a strategy it is absolutely possible for SMEs to achieve and defend a strong international position on the market. ¹²⁷ In the form of intensive customer contacts a permanently customer loyalty can be reached. 128

SMEs are furthermore characterized by the realization of a high product quality and by a distinctively pioneer ambition. 129

In the following we listed the typical strengths and weaknesses of SMEs, referring to literature, in a clear table (Q.v. Fig. 9).

¹²³ Cp. KRÄMER, W.: Mittelstandsökonomik, München 2003, p. 20.

¹²⁴ Cp. AHARONI, Y.: How Small Firms Can Achieve Competitive Advantage in an Interdependent World, in: AGMON, T.; DROBNICK, R. (Hrsg.): Small Firms in Global Competition, New York 1994, pp. 13f.

¹²⁵ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 66.

¹²⁶ Cp. KAYSER G.: Möglichkeiten und Probleme der Internationalisierung von KMU, in: Anpassunsstrategien kleiner und mittlerer Unternehmen an die Globalisierung der Märkte, Essen 1995, p. 30.

¹²⁷ Cp. SEMLINGER, K.; VON BEHR, M.: Die Internationalisierung kleiner und mittlerer Unternehmen als Wissensproblem, in: Internationalisierung kleiner und mittlerer Unternehmen, Frankfurt a.M. 2004, p. 20.

¹²⁸ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 66.

¹²⁹ Cp. ERNST, D.: Internationalisierung kleiner und mittlerer Unternehmen, Wiesbaden 1999, p. 67.

Conceptual Design of a Global Audit to Improve the International Competitiveness of SMEs - 30 -

Figure9: Typical Strengths and Weaknesses of SMEs

Source: Own illustration according to MEYER, M. (2000); LÖSER, B. (2000); PETERS, J. (1986);

WELGE, M. K. (2001).

2.3. Audit

For the reason that we want to create finally an own Global Audit, it is of special importance for our work to clarify initially what the term “audit” means in general.

Because of the variety of audits in practice it is not possible to find one standardized definition in literature. The term audit is originated from the Latin word “audire” or “audition”, which means listening. ¹³⁰ In the English language the term audit is connected with words like revise or prove. ¹³¹ Following the definition of the Net-lexikon general investigation procedures, which are used to analyze process flows, are denoted audit. With the implementation of an audit either the current status should be determined or a comparison between the original aims and the current status should be drawn. Oftentimes an audit is applied to track

¹³⁰ Cp. WAHRIG, G.: Audit, in: Wahrig Deutsches Wörterbuch, Gütersloh 2000.

¹³¹ Cp. ARENTZEN, U.: Auditing, in: Gabler Wirtschaftslexikon A-E, Wiesbaden 1997.

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downgeneral problems or a need for improvement, so that the findings can be cleared. 132

Another definition describes an audit as a detailed examination and estimation of a process of a whole organization or parts of it. Thereby the examination and estimation is carried out by special qualified and independent personnel. According to Klemmer and Meuser the term audit describes the regularly carried out check up of the balance sheet accounting of companies. Fundamentally the basic principle of an audit is to carry out a hearing in which essential information are gathered systematically and which will subsequently be verified evaluatively. During this hearing the concerned companies are bound to externalize the prompted data and to systematize their accomplishing according to the principles of adequate and orderly accounting comprehensible for others. ¹³³ However, in the last time the term audit undergoes a spatial as well as a textual enlargement. The term audit becomes gradually a multinational valid term for business management examinations. In the meantime the term audit also comprises security audits, quality audits, and environmental audits. ¹³⁴ Next to the audits with interbranch norms, quantities of sectoral and customer-specific audits exist. Moreover there are quality contests with corresponding audits and the audits of the financial and controlling area. 135

Audits are mainly used in areas where it is not possible to measure quality on technical or other manners, namely for the evaluation of the efficiency of organizational systems. Audits allow making, for example, complex circumstances or the efficiency measurable and controllable. 136

There are two ways to carry out audits. On the one hand it is possible to conduct an internal audit, where the company executes the audit completely on their own responsibility and on the other hand the company can carry out an external audit,

¹³² Cp. NET-LEXIKON: Audit - Definition, Bedeutung, Erklärung, [www.lexikon-definition.de/Audit.html], (Verfügbarkeitsdatum: 02. September 2004).

¹³³ Cp. KLEMMER, P.; MEUSER, T.: EG-Umweltaudit - Der Weg zum ökologischen Zertifikat, Wiesbaden 1995, p. 21.

¹³⁴ Ibid.

¹³⁵ Cp. ANTONI, C. H.: Anforderungen an den Prozess der Auditierung, in: Qualitätsmanagement in Organisationen, Wiesbaden 2001, p. 141.

¹³⁶ Cp. BMWI: Wettbewerbsvorteil, Familienbewusste Personalpolitik - Leitfaden für mittelständische Unternehmen, Bonn 2001, p. 52.

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whereindependent auditors analyze the company to guarantee an independent appraisal. 137

3. Different Examples of Existing Audits

In this part of our diploma thesis it is our aim to present some common audits that are still in use. In the following examples we want to point out why the respective audit is expedient, what benefit emerges when companies participate in such a program and finally how it is executed in practice. Subsequent to the presentation of each audit it is our purpose to examine the audit for attributes that are typical for the described audit. For the reason that we create a completely new audit it is sensible to review the described audits because they have been proved in practice and therewith can give guidance for the creation of the Global Audit.

Every audit contains different attributes which possibly could be used for the creation of our audit. For this purpose we concentrate on the special features of every described audit and on parallels to adopt respectively transfer them to our audit. For this purpose we will analyze the audits successively and turn out the important attributes, which are, according to our opinion, useful for our Global Audit.

3.1. The Audit “Work & Family”

The first example of still existing audits is the audit “Work & Family”. In the USA the Families and Work Institute in New York developed a rating system for the family-oriented actions of companies for the first time in 1991. Before this rating system had been developed, a lot of studies in the biggest American enterprises took place that should illustrate, which family friendly measures are used in personnel policy practice. After these research projects a scheme has been developed, to record the collected data. In Germany the Hertie-Foundation

¹³⁷ Cp. ANTONI, C. H.: Anforderungen an den Prozess der Auditierung, in: Qualitätsmanagement in Organisationen, Wiesbaden 2001, p. 141.

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promotedthe redevelopment of a list of questions that is adjusted to German circumstances. 138

On the initiative of the non-profit Hertie-Foundation the “Work & Family” GmbH has been found and the audit “Work & Family” has been developed, which should offer new chances for companies. It is a matter of fact that successful companies do not only look at the present but also deal with the affairs of tomorrow. ¹³⁹ As a result of the demographical development companies will be forced to revert to older employees, but also to the men and women, who are on the one hand well qualified, but on the other hand have to care for their family. Companies have to create family friendly working conditions, beyond the statutory determining factors, which make the compatibility of job and family possible. Future-oriented companies, which succeed in creating such working conditions, will be coveted employers and they will be able to employ the qualified staff they need. ¹⁴⁰ The audit “Work & Family” is an appropriate instrument for companies and institutions that plan to create new offers of a family-oriented personnel policy. Consequently the audit “Work & Family” became an accepted management instrument over the past years. 141

The audit does not only examine the still implemented measures of the company but it also shows the company’s individual development potential and assists with realizing future steps. The audit “Work & Family” does not concentrate on the implementation of statutory given generally binding models, but it tries to create company-specific solutions. It is the aim of the audit to present, after the examination took place, an offer for a suitable overall strategy and not only to devise isolated single measures. Furthermore the audit tends to improve the personnel policy of the participating companies lasting. The participation in the project of the Hertie Foundation is not a unique self test, but constitutes a continuous process in which companies profit by the exchange of information with

¹³⁸ Cp. BMWI: Wettbewerbsvorteil, Familienbewusste Personalpolitik - Leitfaden für mittelständische Unternehmen, Bonn 2001, p. 52.

¹³⁹ Cp. HERTIE-STIFTUNG: Das Audit Beruf & Familie - Erweitern Sie Ihre Chancen. Wechseln Sie die Perspektive., Wolfratshausen 2004, p. 3.

¹⁴⁰ Cp. BMWI: Wettbewerbsvorteil, Familienbewusste Personalpolitik - Leitfaden für mittelständische Unternehmen, Bonn 2001, p. 8.

¹⁴¹ Cp. DIHK: Familienorientierte Personalpolitik - Checkheft für kleine und mittlere Unternehmen, Berlin 2004, p. 38.