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      SERVICE FIRMS (Part 1)

Lecture 4: Radulovich, Lori Petrill, 1988, Internationalization of
Professional Service SMEs , pp. 6/53
    Internationalization of Services
     International services are defined as ”deeds,
      performances, efforts conducted across national
      boundries in critical contact with foriegn cultures
      8 (Radulovich L.P., 1988, p. 11).
     Internationalization is defined as ”expansion
      across the borders of global regions and countries
      into different geographic locations or markets”
      (Hitt et al, 1997, p. 767).

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      Global Service Expansion Modes
    1. People-processing services involve transfer of
       intangible product to a physical person such as the case of
       barbers and health-care providers. The distinguishing
       factor of people-processing services is that the
       customer takes part in service production. In addition, the
       customer or service provider must often travel to the
       other party and use equipment for the service to take
       place. Geographic proximity to the customer is important.
       People-processing services must also adapt to the local

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    Global Service Expansion Modes
    2.Possesion-processing services differ from people-processing
      in that service is performed on a physical product to enhance its
      value to the consumer. Dry cleaning or car repair are examples
      of this category. Similar to people-processing services, a
      possession-processing service most often is brought to the
      consumer or the customer may travel to the service to partake of
      its benefits. Geographic presence is also an integral part of this
      service type. Due to standardization of the service, possession-
      processing services are more suitable to internationalization since
      the service provider need not cope with cultural and customer
      differences to any great extent.

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    Global Service Expansion Modes
    3.Information-based services are the result of insight from
      data or information collection, anaylsis and interpretation.
      Infomration-based services globalize with greater ease since they
      may be delivered vial electronic means. Customers do not need
      to be physically close to the service provider hence geographic
      proximity is not critical. Exaples of information-based services
      include banking, accounting, legal services, insurance, health or
      cunsulting services. Information-based services can easily be split
      between centralized back-office processing and front-office local
      delivery to facilitate global expansion and economies of scale.

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                  Services & their character
     Services are generally described as being invisible, intangible,
      non-storable, high fixed-to-variable cost ratio and characterized by
      ssimaltenous production & consumption requiring close interaction
      between producer and user.
     Responses to characteristics like invisibility and intangibility include
      investing in branding and promoting reputation.
     Characteristics like non-storability and higher fixed-to-variable cost
      ratios imply relatively high presssure to sell.
     Consequently services tend to be highly dynamic industries,
      competitive, and with intangible resources contributing to
      successful competition and value creation.

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    Service categorizations
    1) Intangibility differentiates the nature of the
       service act and who or what is the recipient of the
       service. Tangible services are directed at people’s
       bodies (e.g. healthcare, haircutting,
       transportation). Intangble services are actions
       directed at people’s minds (e.g. education,
       museums and information services) or towards
       other intangible assets (e.g. banking, legal services,
       accounting and insurance).

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    Service categorizations
    2)   Hetrogeneity describes the degree of service
         uniqueness provided to each consumer, such as in
         the case of financial, consulting and accounting
         services. Heterogeneity is present when services
         vary from consumer to consumer. In contrast,
         homogeneity of services infers that there is a high
         degree of service consistency, such as in the form
         of standard quality, a reliable service, and
         consistent service delivery. Example of service
         delivery includes consistent delivery of a pre-
         recorded entertainment program (TV soap boxes).
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    Service categorizations
    3) Inseparability refers to the simaletnous
     production and consumption, as when the customer
     is a coproducer of the service. Examples of
     inseparable services include air travel and hotel
     services. In contrast separability refers to degree to
     which the customer is not involved during service
     production and need not be present during service
     consumption. For example, professional financial
     managers receive and invest funds from clients
     without the consumer being present. Services that
     are separable may be more easily internationalized.
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     Service categorizations
     4) Persishibility indicates that a service may not be
      captured and stored for later use, such as in the case
      of hotels. Rooms are either occupied or not
      occupied, and service capacity use varies
      accordingly. In contrast, examples of non-perishable
      services include: music recordings, news broadcasts,
      and educational video-recorded instructional classes.
      In these services, the creation of the service product
      may take place at a different time from service
      consumption. In the music case purchasing a CD or
      attending a live concert are contrasting options.
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     Services profile in various countries
      Services are more likely to be customized from
       country to country to take local legal and
       other environmental conditions into account.
      There are minimal economies of scale achieved
       by centralized production.
      One powerfull pull to globalize is from client
       demand for the service provider to follow
       them in their overseas expansion activities.

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        Categories of clients that benefit from
        internationalization of services
     1. Global clients that prefer the same service provider
        in the various country markets in which they do
     2. Local clients that require some globally
        standardized services
     3. Local clients who simply prefer a global service
        provider for a variety of reasons like perceived
        quality, global knowledge sharing opportnities, or
        personal preferences.

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     Why do services go global?
      Foreign markets may present good
       business opportunity
      Home country clients may demand that
       service provider follows them overseas
      A firm’s proven ability to shift product-
       market focus (i.e. diversify) is also a
       defensive foil against possible invasion of
       their turf by competitors.
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     Degree of internationalization
      The degree of internationalization reflects a firm’s level or extent
       of international diversification and is often reflected by the
       number of different markets in which it operates and its
       importance to the firm − often measured as the percentage of
       foreign sales to total sales.
      Global market diversification provides firms with opportunities
       to increase returns by leveraging existing products and
       competencies acrosss multiple global markets for higher
       performance with lower risk (Hitt et al, 1997).
      Global diversification offers opportunities for economies of scale
       and scope.

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      Resource-based View of Interationalization (RBV)
      RBV states that firm heterogeneity and firm-
      specific resources create a sustainable
      compeititve advantage creating resources that
      are valuable, rare, inimitable and non-
      substituteable. Resources encompass three
      general categories: physical capital resources,
      human capital resources, and organizational
      capital resources.

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        Resource-based View of Internationalization (RBV)
      Physical capital resources encompass physical technology,
       property, plant, equipment and access to raw materials.
      Human capital resources include the ”training,
       experience, judgement, inteligence, relationships, and
       insight of individual managers and workers in a firm”
       (Barney, 1991, p. 101).
      Organizational capital resources involve the firm’s
       reporting structure, planning processes, control and
       coordination systems, and information relations among
       workers within the firm, between firms, and its

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      Knowledge-based View of Internationalization (KBV)

      KBV asserts that knowledge is a key factor
      contributing to a firm’s internationalization
      and that firms are repositories of knowledge.
      The knowledge-based view, an extension of the
      RBV, is the dominat theory used to explain
      internationalization of knowledge-intensive
      firms in dynamic environments characterized
      by highly competitive knowledge-based
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     Avoidling failures when going global
     1. Are there potential benefits for our company?The race
        to globalize sometimes leads people to overestimate the prize.
        Sometimes even when a company fully transfers relevant
        technology, there may not be value in doing so in some
        markets (e.g. UK Redland and concrete roof tiles for US and
     2. Do we have the necessary managment skills? Even if
        potential benefits exist for your company you may not be in a
        position to realize them. One must have a good track record of
        exhibiting performance at global level instead of being a home-
        town company (e.g. Daimler-Benz+Chrysler).

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     Avoidling failures when going global
     3. Willthe costs outweigh the benefits? Even if
      you are able to realize the benefits of a global
      move, unanticipated collateral damange to your
      business may make the initiative counter-
      productive. (e.g. China’s TCL ended with four
      R&D hq, 18 R&D centers and 20 manufacturing
      bases and sales organizations in 45 countries). The
      cost of managing this infrastructure has outweighed
      the benefits of increased scale and resulted in large

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     Strategies for internationalization of services
     1.   Direct export (in industrial markets e.g. repair of valuable
     2.   Systems export (joint export effort by two or more firms
          whose solutions complmenet each other’s e.g. turnkey factory
          + maintance of facility)
     3.   Direct entry by establishing a service-producing organization in
          a foreign market
     4.   Indirect entry by acquiring a local firm so as to minimize risk
          of failure when establishing a new organization from gound
          zero up
     5.   Electronic marketing through the Internet

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