How IT can help SMEs go global

The world is the marketplace for information technology today, and has created exciting opportunities for smaller entrepreneurial and innovative firms. Exploiting them, however, is no easy task.

Even in the case of India, it is the names of giants such as Infosys and Wipro that roll off the tongue when talking about the country's software success story.

Yet, small and medium-sized enterprises can be, and are, part of the action. The SME Forum formed by the National Association of Software and Service Companies signals the importance of smaller firms.

What, then, are the keys to success for Indian software SMEs at a global level? I highlight three lessons, based on a three-year study (2002-05) that I undertook on the Indian software SMEs going globali, entailing longitudinal case studies and a survey of over 100 firms.

The key message is that it is crucial to jointly leverage internal (especially knowledge) and external (especially network) resources.

Leverage market knowledge

By their nature, technological knowledge is a fundamental basis of competitive advantage for software firms. This was unsurprisingly confirmed by the study; the greater an SME's technological knowledge, the better its growth performance.

What, however, the study also showed was that technological knowledge alone is not sufficient. Market knowledge was found to be as crucial a success factor, if not more, in achieving international growth. There are at least three vital facets of market knowledge.

First, an understanding of potential customers and competitors in the key market(s). Second, knowledge about norms, laws and language. Third, expertise over developing and executing a strategy to go global.

The last-mentioned is, perhaps, the most versatile in that it can be applied widely. For instance, one Bangalore-based firm studied over a three-year period clearly recognised this and was able to successfully enter new markets in Europe by methodically applying and continually refining its market knowledge.

By contrast, another promising firm in Bangalore with a strong technological offering and venture capital funding floundered in its efforts, clearly due to a lack of market knowledge. One way of enhancing market knowledge is to learn through networks.

Learn through networks

While internal knowledge resources are important, SMEs must also leverage external resources. This means leveraging network relationships -- with customers, suppliers and strategic partners and so on.

Indeed, SMEs worldwide are known to use their networks extensively, which leads to many business opportunities. However, the point I'm making is somewhat different: network relationships should also be seen -- perhaps primarily -- as sources of valuable knowledge, especially of market knowledge.

In other words, it is vital for firms to learn through their networks. As one Indian software entrepreneur who was interviewed put it, "If I gain a new business contract because of a relationship, it is like being given a fish and I will be hungry tomorrow. But if I gain knowledge about how to do business well, it is like being taught to fish." This calls for a different mindset compared to an opportunity-seeking approach of generating trade leads or new business.

An undue emphasis on business opportunities, rather than on learning opportunities, can be misplaced and myopic. While the study suggests that the more successful Indian software SMEs do acquire market knowledge through networks, not all firms are effective on this count.

In the survey, about 40 per cent of SMEs with extensive network relationships stated that they did not enjoy information benefits through their networks. This calls for some introspection. Are Indian software SMEs utilising their networks optimally? One key consideration in utilising networks in a strategically appropriate manner is to recognise differences among network relationships.

Utilise relationships appropriately

A deeper understanding of networks will further strengthen the odds of global success for SMEs. A starting point is the recognition that not all network relationships are the same. For instance, SMEs could distinguish between bonding and bridging network relationships, a distinction that the World Bank has recently highlighted.

Bonding relationships are ties with similar entities; for instance, other local SMEs or non-resident Indians. Bridging relationships are ties with dissimilar entities, such as local multinational subsidiaries (Microsoft India, for instance) or mainstream foreign clients. Bonding relationships are associated with trust; therefore, timely assistance may be obtained through them.

Bridging relationships are linked with novelty; therefore, new information and opportunity can arise from them. It could be seen from the study that bonding relationships can enable SMEs to establish a physical presence -- through, for instance, a strategic alliance or sales office -- in foreign markets.

This presence, in turn, helps to create a virtuous cycle of acquiring/strengthening network relationships and knowledge gain.

A different benefit was found in the case of bridging relationships. These were found to facilitate growth in international revenues, especially at early stages, and to result in higher sales turnover. Thus, both bonding and bridging relationships are important but have differing roles. SMEs could thus view their network relationships as a portfolio of bonding and bridging relationships.

As with any portfolio, there may be gaps to fill. And there should be realistic expectations of the relationships in the portfolio. In the absence of such realism, unwarranted disappointment can set in.

In summary, the take-away for software SMEs is three-fold. First, market knowledge must be focused on as much as technological knowledge. Second, a valuable source of market knowledge is interaction among network relationships. Third, network relationships differ in their potential benefits -- and must be appropriately utilised.

Thus, the key insight provided by the study is that a dual task is required to become a global success: internal knowledge and external networks must be cultivated and leveraged. The good news is that, if approached with the right orientation and mindset, these can be mutually reinforcing: knowledge can be enhanced by learning through networks and networks grow as a firm's increased knowledge facilitates further expansion.

That is not to say that these can be easily achieved. Rather, they constitute a challenge, but a worthwhile one, since the reward can be considerable.