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An analysis of product-market strategy and export performance: evidence from SME's in Saudi Arabia.

INTRODUCTION

Exporting is one of the most common entry modes to international markets. Consequently, exporting and export behaviour have been a primary area of interest in the international marketing field and the focus of extensive marketing literature (for example, Lado et al, 2004; Leonidou et al, 1998). Although past research has established the relationship between marketing strategy and performance in the domestic marketing context, empirical work in the context of export marketing has been scanty and fragmented (Zou and Cavusgil 2002). Leonidou et al (2002) observe that while this stream of research has identified marketing strategy elements that influence export performance, the findings reported in the literature are characterised by fragmentation and diversity, limiting theory development, as well as making improvements in management practice.

Nevertheless, most of the studies on marketing strategy determinants of export performance have focused on developed or western country settings. For example, Katsikeas, et al (1996) use empirical research to find the determinants of export performance of exporters from Greece. Other studies in other western countries are numerous (for example, Chetty & Hamilton, 1993; Slater & Narver, 1993; Bodur, 1994; Couto, et al, 2006) with little empirical evidence obtained from Middle East. Within the Middle Eastern region, Saudi Arabia is a key member of the Gulf Cooperation Council (GCC), which is the most powerful trade group in the Middle East. In the trade arena, GCC's objective is to achieve free trade arrangements with the European and Asian nations besides unification of trade policies and importation systems.

That Saudi Arabia is world's largest exporter of crude oil is well known. However, the Kingdom has been making concerted efforts at diversifying its export base. The non-oil exports amounted to $20 billion in 2007, up from $16 billion in 2006 and $12.8 billion the previous year. In the non-oil exports, sectors such as metal products, electrical goods, machinery and industrial equipment, construction materials, wood products, textiles and garments as well as food and beverages have been growing in importance. Accession to the World Trade Organization (WTO) has given the Kingdom's export efforts a huge boost to strengthen its position in the fast growing markets in the Middle East as well as in Asia. Membership of WTO has given a competitive advantage to exporting SMEs operating within the petrochemical industry, which enjoys several comparative advantages. Further, because of membership of WTO, removal of trade barriers in the EU, US and Japanese markets is allowing SMEs in the Kingdom to offer substantially lower prices to previously tariff-protected markets.

The present study builds on previous work and focuses on the relationships between export performance and marketing strategies of SME's in Saudi Arabia. The key role of SME's in exporting has led to a large number of investigations into the factors associated with export success for over almost half a century (Tookey, 1964; Cunningham and Spigel, 1971; Wolff and Pett, 2000; Williams, 2006). In particular, studies have explored the relationships between successful export performance and export marketing activities (Lee and Yang, 1990).

This study consists of five sections, inclusive of this introduction. In the second section, literature is reviewed, a conceptual framework is presented and hypotheses are developed, and the third section explains the research methodology used and data collection process. The fourth section reports the findings and the implications of study. The final section concludes by outlining the limitations of the study.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

SME Characteristics

Exporting is the preferred mode of internationalisation of SME's. Although, SMEs face challenges in competing on price with larger firms, they have their own strengths. A key strength is their lighter structure, which allows them rapid adaptation of their export strategies to the special needs of the foreign market (Lages and Montgomery, 2004). Recent studies have attempted to identify the factors that stimulate SMEs in their exports (example, Leonidou, et al, 2007). In general, size of firm, categorised as large on one hand and small to medium on another have been widely examined as a potential predictor of export performance (Babakus, et al, 2006). Many researchers assumed that larger firms tend to be better international performers. Much previous research found a positive impact of firm groups on export performance and supported the conventional wisdom that a larger firm with greater resources compared to their smaller counterparts tended to perform better in foreign markets (Babakus, et al, 2006). This theory finds support in instances where sales volume is used as a measure of firm size, and export performance is measured by export volume. This suggests that larger firms with large dollars sales are likely to have high export volume but that does not mean that they have higher export to total sales ratio and higher export growth than smaller firms do. Firm size as a variable has no impact on performance measures (example, Baldauf et al, 2000; Francis and Collin-Dodd, 2000) suggesting that SME's may have the ability to perform as well as their larger counterparts in foreign markets.

Previous research on export performance has examined the effect of a broad range of variables on the export performance, among which are market characteristics (Stewart and McAuley, 2000). The internal SME specific factors include firm and management characteristics such as size, management commitment to exporting, managers' attitudes and perceptions towards exporting, competition, market potential, risk and profitability. The relationship between market characteristics and export behaviour has been extensively studied in the export management literature (for example, Shamsuddoha and Ali 2006; Francis and Collin-Dodd, 2000; Lu and Beamish, 2001; Aaby and Slater, 1989), but its impact on export performance is far from clear. Whilst a positive impact has been found by many researchers (Babakus, et al, 2006; O'Cass and Julian, 2003a; Javalgi et al, 2000) researchers have also reported a non-significant impact (Ali, 2004) or mixed results (Baldauf et al, 2000). Based on empirical evidence, Cavusgil (1984) argued that the true relationship is not between size and export behaviour, but between various advantages, which accrue from large size, product and market characteristics.

Export Marketing Strategy

One of the roles of export companies is to develop and implement export-marketing strategies (Timmor and Zif, 2005). As world markets globalise, the effect of global marketing strategy on a firm's performance has been frequently discussed in the literature. Export marketing strategy is the means by which a firm responds to market forces to meet its objectives .The key aspects of export marketing strategy include product, price, promotion, distribution, and the decision to standardise or adapt to the conditions of foreign markets (Cavusgil and Zou, 1994; Douglas and

Craig, 1989).

Many researchers (Birkinshaw, et al, 1998; Lages, 2000) argue that global marketing strategy plays a critical role in determining a firm's performance in the global market. The relationship between export marketing strategy and performance has received considerable attention in the literature (Lee, 2004). Systematic examinations have been made of the relationships between marketing strategy and performance (example, Tang, et al, 2007). Yet there is little agreement as to what constitutes global marketing strategy.

Export Performance

Exporting is one of the significant preliminary steps of an enterprising organization towards expanding its international business activities. There is a lack of uniformity in conceptualisation, definition and measurement of export performance; and difference among countries' export performance in export literature (Eusebio, et al, 2007). This has contributed to the challenge of identifying and understanding the antecedents of export performance (Madsen, 1989; Zou, Taylor and Osland, 1998). A comprehensive survey of the literature by Katsikeas, et al (2000) revealed that export intensity, export sales, export growth, and export profitability are the four most used measures of economic export performance. Export intensity is the ratio of export sales to a company's total sales and it is the most widely used economic measure of export performance in the literature (Katsikeas et al, 2000). This is followed by export sales, which indicates the size of export earnings in dollar value for a company (Madsen, 1989). The two other measures of economic export performance are export growth, which is an increase of exports over a certain time period (Aaby and Slater, 1989) and export profitability--either an objective financial measure of profitability of the export venture or a subjective assessment of the profitability of exporting compared to domestic marketing (Baldauf et al , 2000).

It is argued in the literature that firms set goals to achieve strategic objectives such as international market entry, market share and strategic position in international marketing rather than just financial goals (Cavusgil and Zou, 1994; Johnson and Arunthanes, 1995). Thus, alternatively, export performance measures a firm's outcomes in its international operations, which encompass both financial goals over a certain time horizon (Baldauf et al, 2000). An alternative to an objective measure of export performance would be to measure managers' subjective assessment of satisfaction with export success (Evangelista, 1994). The use of a composite measure of export performance that incorporates financial performance, and managers' subjective assessment of performance of the export market venture has also gained support in recent years (Cavusgil and Zou, 1994; Julian and Ali, 2004; Zou, et al, 1998).

HYPOTHESES

Export Marketing Strategy and performance

The relationship between marketing strategy and performance has been well documented in the domestic marketing context (Cavusgil and Zou, 1994).Similarly, the linking of marketing strategy to export performance has been one of the most widely investigated topics in international marketing research (Namiki, 1994; Zou and Stan, 1998). In the international marketing context, a number of studies (Lee, 2004) have suggested that export performance is influenced by export marketing strategy. Thus, it is hypothesised that export-marketing strategy will enhance export performance of Saudi exporters. More formally stated:

H1: The higher the commitment to exporting strategy of Saudi SME's, the greater the contribution to export performance

Effects of product and market characteristics on export marketing strategy

A review of the strategy literature reveals that strategy formulation is also influenced by product characteristics (Lado, et al, 2004). Product characteristics influence the marketing strategy in an export venture (La, et al, 2005). Relevant product characteristics that influence export-marketing strategy include culture-specificity, strength of patent, unit value, uniqueness, age, and service/maintenance requirements of product. In formulating a marketing strategy for export markets, a major consideration is product related (Greenley, 1993; Sudharasam, 1995; Hooley et al, 1998). Hence the following hypothesis

H2a: Marketing strategy of Saudi SME exporters are positively influenced by product characteristics

Further, conditions in foreign markets pose both opportunities and threats for exporters. Consequently, export-marketing strategy tends to be conditioned by export market selection (Lado et al, 2004). The key characteristics of the export market that affects the choice of export marketing strategy include demand potential, cultural similarity to home market, familiarity with the product, brand familiarity of export customers, and similarity of legal and regulatory frameworks. Thus, the following hypothesis:

H2b: Marketing strategy of Saudi SME exporters are positively influenced by export market characteristics.

Effects of product, market and strategy characteristics on export performance Product characteristics have been identified as having a significant influence on the marketing performance of a specific venture in an international market (O'Cass and Julian, 2003). Product characteristics that have been argued to influence marketing performance include culture-specificity, strength of patent, age, unit value, uniqueness and service/maintenance requirements (Cavusgil and Zou, 1994).

Firms engaging in product adaptation can meet cross-border differences of the needs and wants of the firm's target customers, thus increasing customer satisfaction and overall performance (Cavusgil and Zou, 1994). Thus, it is hypothesised that export products characteristics will enhance export performance of Saudi exporters. More formally stated:

H3a: Product characteristics of Saudi SME exporters have a significant effect on their export performance

Findings of research on determinants of export performance support the contention that market characteristics, among others, are also a significant determinant of export marketing performance (Katsikeas, et al, 2000; Brouthers and Nakos, 2005). A study of Greek exporting firms by Brouthers and Nakos (2005) found that systematic international market selection is a significant determinant of export performance. The study concentrated on the criteria SMEs use in selecting export target markets. Similar findings were also reported in another study (Ali, 2004).

Thus, the following hypothesis is proposed:

H3b: Market characteristics have a positive influence on the export performance of Saudi exporters.

CONCEPTUAL FRAMEWORK

Based on the study's objectives, which were substantiated by the reviewed literature, the theoretical model for the study was conceptualised and depicted in figure 1. The model shows the constructs and hypothesized relationships investigated in the study.

Methodology

The study adopted survey method to determine the impact of Saudi SME's product and market characteristics on marketing strategies and export performance. The survey instrument utilized for the study reflected the framework depicted in Figure 1. Based on the developed model, a survey instrument was developed specifically for this study.

[FIGURE 1 OMITTED]

METHODOLOGY AND DATA COLLECTION

Measurement

The design of the questionnaire was based on issues raised in the literature. The questions to the key constructs as outlined in the conceptual model in Figure 1, were derived from past survey instruments with modifications to suit the model requirements.

Items used in the measurement of export marketing strategy, product and export market characteristics were adapted from Cavusgil and Zou (1994) and Lee 2004). To measure export performance, items were drawn from Cavusgil and Zou (1994); Akyol and Akehurst (2003) and Cadogan et al (2002). A pre-test of the instrument was conducted on export managers of three SMEs, in order to ensure clarity and validity of the survey instrument. Some minor changes were made to produce a final version. The final version of the instrument had four major sections. The first section comprised of general questions to elicit information on the individual and the profile of SME. The following two sections comprised of questions to measure product characteristics and export market characteristics. Likert-scale five-point category response format with category labels ranging from "strongly disagree " to "strongly agree " were employed. The fourth and fifth section sought to capture information relating to export marketing strategy and export performance. For both these sections, five-point category response formats were used with category labels varying from "strongly disagree" to "strongly agree".

All the scales and their psychometric properties are shown in Table II.

Data Collection

The target respondents were managers involved in exporting activities of SME's. Respondents chosen were thus those who were generally competent to evaluate their companies' export performances. The target population included all SME's in Saudi Arabia. In the absence of uniform conceptualization, we consider small business as those having less than 100 employees, while medium-sized business are considered as having between 100 to 500 employees.

Primary data collection poses numerous challenges to researchers in Saudi Arabia (Sohail and Abdali, 2005). Due to the closed nature of the Saudi society and its SME's, and a general apathy to unsolicited surveys, repeated waves of reminders and callbacks were undertaken. Further, due to a preference for formality, research assistants were engaged to make personal visits and to distribute/administer the survey questionnaire in SME's, which had consented to participate.

Due to the lack of the lack of complete and reliable sampling frames from which to draw probability samples, most empirical studies have relied on convenience samples in the Saudi environment. Convenience sampling was also used for the present study. Research assistants under the direct supervision of the researchers visited the targeted industrial cities, soliciting the participation of exporting managers. Managers who voluntarily agreed to participate were provided with the questionnaire. One thousand questionnaires were distributed in this manner. All these efforts yielded 214 completed questionnaires, for a response rate of 21 per cent, which compares very well with response rates from other studies in Saudi Arabia., for example Sohail and Abdali (2005).

STUDY FINDINGS AND IMPLICATIONS

Survey responses and profile of respondent SME's

Of the 214 respondent SME's, 52 companies (24 per cent) were categorised as dealing in exports of consumer goods; 55 per cent of them were engaged in manufacture of industrial goods, while the remaining 21 per cent were exporting other goods (see Table 1). Just about half of all companies have been exporting their products for over 12 years. The next highest category of the respondents is those companies whose products have been exported between 4 to 7 years, which constitutes 21 percent of the responses. About 14 per cent of the SME's have been exporting between 8 to 12 years and the remaining 14 per cent of the SME's have exporting their products for less than 3 years.

The demographic profile of the companies surveyed for the study also indicates that over 80 per cent of the SME's export to different export markets between 1 to 7 markets. Most of the SME's (36.45 per cent) export to 4 to 8 markets, while the least number of companies (3.74 per cent) export to over 30 markets. From this table, it can also be seen that 26.17 per cent, 24.30 per cent and 23.36 per cent of the companies have proportions of their export sales equals to less than 10 per cent, 10 per cent--20 per cent and 21 per cent--30 per cent of their annual sales respectively. The percentage of companies with export sales between 31 per cent--40 per cent is 6.54 percent; 41 per cent--50 per cent is 10.28 percent; and more than 50 per cent is 8.41 percent.

HYPOTHESES RESULTS

A two-stage multiple regression procedure was used to test the hypotheses. In the first stage, export marketing strategy was entered as a dependent variable with Product characteristics and export market characteristics as independent variables. In the second stage, export marketing strategy, product characteristics and export market characteristics were entered as independent variables with "export performance " as dependent variable. The two equations are of the form:

Export Marketing Strategy = [a.sub.1], + [[beta].sub.1] Product characteristics + [[beta].sub.12] Export Market Characteristics + e

Export Performance = [a.sub.2], + [[beta].sub.21] Product characteristics + [[beta].sub.2] Export Market Characteristics + [[beta].sub.23] Export Marketing Strategy + e

Estimates for Equation (1) were used to test H2a andH2b, while those for Equation (2) were used to test H1, H3a and H3c. Table III shows results of these analyses. Estimates for the first regression equation are presented in the top half of the Table (Model I) while those for the second equation are shown in the bottom half (Model II). The results for Model I indicate that both these relationships are not only in the predicted positive direction, but the estimates for product characteristics (B = 0.200;p < 0.005) and export market characteristics (B = 0.218;p < 0.0001) are statistically significant. Thus, both H2a and H2b are supported by the data. For export marketing firms in Saudi Arabia, the determinants of export marketing strategy are product characteristics and export market characteristics. Together, these two variables explain a little over 17 percent of the variance in export marketing strategy.

In model II the statistically significant estimates are those for product characteristics (B = 0.260;p < 0.05) and export marketing strategy (B = 0.439;p < 0.0001). Thus, hypotheses H3a and H1 are supported, while H3b does not find support. Export marketing strategy and product characteristics are the significant determinants of export performance. The two factors account for nearly 27 percent of the variance in export performance evaluation.

STUDY IMPLICATIONS

This study examined the effects of product and export market components on the marketing strategy and export performance of SME's in Saudi Arabia. The results show that SME's export marketing strategy is positively related to product and export market characteristics. On export performance, results of the present study show that this is positively related to the export marketing strategy and product characteristics. Export market characteristics do not have a significant effect on SME's export performance.

The significant effects of export marketing strategy with product and export market characteristics are quite consistent with findings of recent studies having similar constructs (Ali, 2004).However, the findings of the present study is also consistent with findings of previous studies when comparing the effect of market characteristics on export performance ( For example, Aaby and Slater, 1989; Katsikeas, et al ,2000; Lim, et al, 1996, and Brouthers and Nakos, 2005.

The study findings have broad and specific managerial implications for Exporting SME's in Saudi Arabia. At the broader level, the finding that product and export market characteristics are important determinants of SME's marketing strategy implies that SME's must focus on these factors when developing an export marketing strategy.

From a practical point of view, the study provides an avenue to explore the directions in marketing strategy and determinant of export performance of SME's in Saudi Arabia. This study is more exploratory in nature as few studies in this direction have been made in the past in Saudi Arabia.

Limitation of the study

A few limitations are identified and recognized while conducting this research. Firstly, the size of the sample was limited and hence care should be taken when generalizing the findings of this study. Secondly, the present study includes SMEs from a wide variety of industries. For the present study, this has ensured a larger sample than would otherwise have been obtained if it had been restricted to a particular industry. Future studies may consider limiting the investigation to a particular industry, because exporters from different industries are likely to place different emphasis on different aspects of export marketing strategy and performance evaluation.

ACKNOWLEDGMENT

The authors acknowledge the research support received from the King Fahd University of Petroleum & Minerals, Saudi Arabia in completion of this research.

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M. Sadiq Sohail, King Fahd University of Petroleum & Minerals

Aref A. Alashban, King Fahd University of Petroleum & Minerals
Table I: Demographic profile of respondent SMEs

                                            No. of SMEs   Percentage

Type of products exported
Consumer                                        52          24.29
Industrial                                      118         55.14
Other                                           44          20.56
No. of years SMEs in exporting
Less than 1 year                                10           4.67
1 to 3 years                                    20           9.35
4 to 7 years                                    44          20.56
8 to 12 years                                   30          14.02
More than 12 years                              110         50.47
No of markets for regular export
1 to 3                                          64          29.91
4 to 8                                          78          36.45
4 to 7                                          36          16.82
15 to 20                                        12           5.61
21 to 30                                        14           6.54
More than 30                                    10           467
Average %revenue from annual export sales
Less than 10 %                                  56          26.17
10 to 20 %                                      52           24.3
21 to 30 %                                      50          23.36
31 to 40 %                                      14           6.54
41 to 50 %                                      22          10.28
More than 50 %                                  20           9.34

Table II Measurement and scale properties of constructs

                                                             Std.
                                                   Mean    Deviation
Scale items
Product characteristics
Well established product                           4.523     0.718
Design and feature unique                          3.726     1.159
Product can be used in different culture           4.104     1.171
Product carefully planned for entry in
  foreign market                                   3.886     1.022
Management committed to export                     4.364     0.770
Commit non managerial resource for export          3.275     1.136

Export Market Characteristics
Export Market very competitive                     4.308     0.905
Product extensively exposed in export market       3.705     0.980
Product familiar to customers in export market     3.981     0.931

Export Marketing Strategy
Target markets are clearly specified               3.781     0.930
Adaptation before entry is substantial             3.385     0.998
Adaptation after entry is substantial              3.295     1.168
Use local languages in product label               2.971     1.312
Adapt product positioning strategy                 3.500     0.931
Adapt packaging                                    3.535     1.064
Adapt promotional approaches                       3.563     0.997
Provide overall support to foreign
  distributors/subsidiary                          3.971     0.912
Provide training to the samples force of foreign
distributor/subsidiary                             3.176     1.155
Provide Promotional support to the samples force
  of foreign distributor/subsidiary                3.451     1.114
Price is very competitive                          3.856     0.841

Export performance
Sales of exported products have increased          3.921     0.966
Profitability of export products has improved      3.535     0.867
Market share of export products have improved      3.802     0.895
Overall financial performance of our product
  have improved                                    3.717     0.770
Export objectives of products generally met        3.436     1.014

                                                   Cronbach's Alpha
Scale items
Product characteristics
Well established product                                0.679
Design and feature unique
Product can be used in different culture
Product carefully planned for entry in
  foreign market
Management committed to export
Commit non managerial resource for export

Export Market Characteristics
Export Market very competitive                          0.601
Product extensively exposed in export market
Product familiar to customers in export market

Export Marketing Strategy
Target markets are clearly specified                    0.798
Adaptation before entry is substantial
Adaptation after entry is substantial
Use local languages in product label
Adapt product positioning strategy
Adapt packaging
Adapt promotional approaches
Provide overall support to foreign
  distributors/subsidiary
Provide training to the samples force of foreign
distributor/subsidiary
Provide Promotional support to the samples force
  of foreign distributor/subsidiary
Price is very competitive

Export performance
Sales of exported products have increased               0.869
Profitability of export products has improved
Market share of export products have improved
Overall financial performance of our product
  have improved
Export objectives of products generally met

Notes: statements measured 1= Strongly Disagree, 5= Strongly Agree

Table III: Unstandardized regression coefficients for determinants of
export marketing strategy and performance

                                                         Std.
                                                   B     Error

Model 1--Dependent variable= export marketing
  strategy
(Constant)                                       1.831   0.448
Product Characteristics                          0.200   0.096
Export Market Characteristics                    0.218   0.081
[R.sup.2] = 0.175; F = 7.379 **

Model 2-Dependent variable= export marketing
  performance
(Constant)                                       0.576   0.548
Product Characteristics                          0.260   0.111
Export Market Characteristics                    0.131   0.094
Export marketing strategy                        0.439   0.111
[R.sup.2] = 0.272, F = 12.053 ***

                                                     T

Model 1--Dependent variable= export marketing
  strategy
(Constant)                                       4.087
Product Characteristics                          2.080 **
Export Market Characteristics                    2.684 ***
[R.sup.2] = 0.175; F = 7.379 **

Model 2-Dependent variable= export marketing
  performance
(Constant)                                       1.051
Product Characteristics                          2.352 *
Export Market Characteristics                    1.393
Export marketing strategy                        3 951 ***
[R.sup.2] = 0.272, F = 12.053 ***

Notes: *** p <0.0001, ** p < 0.005, * p <0.05
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Author:Sohail, M. Sadiq; Alashban, Aref A.
Publication:International Journal of Entrepreneurship
Date:Dec 1, 2009
Words:5836
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