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Internationalization strategies for services

Article  in  Journal of Services Marketing · August 1999

DOI: 10.1108/08876049910282547

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 An executive summary for
managers and executive
readers can be found at the
end of this issue
Relatively slow growth
290 JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999, pp. 290-297, # MCB UNIVERSITY PRESS, 0887-6045
Internationalization strategies
for services
Christian GroÈnroos
Professor of Marketing, CERS Center for Relationship Marketing and
Service Management, Hanken Swedish School of Economics,
Helsinki, Finland
Keywords Services marketing, International marketing, Market entry, Marketing strategy
Abstract Discusses some key challenges for service firms planning to go abroad and
presents five different types of internationalization strategies for services, none of which
are mutually exclusive. These are: direct export of services in terms of repairs and
maintenance that are most appropriate to industrial markets; systems export that is a
joint export effort by two or several firms whose solutions complement each other; direct
entry mode which means that the service firm establishes a service-producing
organization of its own on the foreign market; indirect entry which is used when the
service firm wants to avoid establishing a local operation that is totally or partly owned
by itself (common modes are through licensing agreements and franchising); and
electronic marketing which does not bind a firm to a particular location.
Introduction
Traditionally, services have been thought of as locally produced solutions,
and service firms have been considered local establishments. Although
services still, to a large extent, are produced by small and local firms, service
businesses have become more international. The service sector is expanding
over national borders. The Uruguay Round and the 1993 General Agreement
on Tariffs and Trade Agreement (GATT) have lowered barriers for
international trade with services. A rapid globalization of the world economy
during the 1990s, which probably will continue in the next millennium, has
increased the opportunities for marketing services abroad (Hassan and
Kaynak, 1994). Indeed, services are the fastest growing part of international
trade (Bradley, 1995). However, for example, in the USA the export of
services still accounts for an astonishingly small proportion of total service
production, only around 6 percent in 1997, in spite of a growth of nearly
30 percent since the beginning of the decade (Winstead and Patterson, 1998).
In the European Union between 10 and 20 percent of the service production
was exported already almost ten years ago (cf. Dahringer, 1991). According
to Winstead and Patterson (1998), the relatively slow growth of the
internationalization of service, in spite of the improved free-trade conditions,
depends on the existence of significant non-tariff barriers in many service
industries and the complex nature of service production as well as on a belief
among practitioners in service businesses that it is difficult to market
services outside domestic markets. They also state that more general
obstacles for internationalization, which are true for manufactured goods as
well, keep service firms from going abroad. Such obstacles are a lack of
resources, too little knowledge about exporting and a belief that linguistic
and cultural differences will make internationalization too demanding. The
purpose of this article is to discuss some key challenges for service firms
planning to go abroad and to present five different types of
internationalization strategies for services.
The current issue and full text archive of this journal is available at
http://www.emerald-library.com

Most of the literature
geared to the
manufacturing sector
New forms of
internationalization
JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999
The internationalization challenge
A traditional way for service firms to start going abroad is to follow
manufacturers that they are supplying with services in their domestic
markets. When their clients internationalize, they get an opportunity to go
along and sometimes almost are forced to do so (Weinstein, 1977;
Vandermerwe and Chadwick, 1989). For example, in studies of the banking
and advertising industries, following clients was found to be a major reason
for internationalizing (Nigh et al., 1986; Terpstra and Yu, 1988). Now, ways
of internationalizing services have become more diverse as, for example, the
development of new technologies for electronic commerce has made
services less dependant on local operations (Winsted and Patterson, 1998).
Most of the literature on internationalization, international marketing and
export strategies is geared to the needs of the manufacturing sector. In many
studies of manufacturing firms, for example, the impact on export behavior
of firm characteristics such as size, age, ownership and sales has been
investigated (e.g. Burton and Schlegelmilch, 1987; Cavusgil and Nevin,
1981). However, in a recently reported study by Javalgi et al. (1998) such
firm characteristics do not seem to differentiate exporting service businesses
from non-exporting. Even in 1990, Erramilli and Rao (1990) noticed that we
know very little about how service firms enter foreign markets, and their
observation holds true even today. ``For international services, theory lags
practice by a considerable degree'' (Clark et al., 1996, p. 9). It is a fact that
international marketing of services is becoming a considerable part of total
service marketing. The academic community has a responsibility to fill the
knowledge gap that exists today.
In the literature on international marketing of services, an
internationalization strategy is often considered more risky for service firms
than for manufacturers of goods (Carman and Langeard, 1980). One reason
for this is that in many services the producer and the production facilities are
part of the service, which requires that the firm has greater control of its
resources than would otherwise be the case (Palmer and Cole, 1995). In
traditional international marketing models focusing on the needs of
manufacturing firms, the internationalization process can start in a minor
scale using indirect export channels followed by a step-by-step move
towards more direct channels. This enables the firm gradually to increase its
understanding of quality expectations, personnel requirements, distribution
and media structures, and buying behavior peculiarities on the foreign
market. For service firms the situation is different. One way or the other, it
immediately faces all this and other problems related to entering a foreign
market, (Carman and Langeard, 1980). It has to find an entry mode and a
strategy that helps it to cope with this situation as well as possible. The
choice of course depends on the type of service and market.
General entry modes
In the literature it has been suggested that the choice of entry mode for
service firms when going abroad is either to follow existing clients when
they internationalize or to look actively for new markets (Erramilli and Rao,
1990; see also Majkgard and Sharma, 1998). Today, however, the
technological advancements, as far as for example the Internet and satellite
and digital television are concerned, have created totally new forms of
internationalization. In many cases going abroad is not a choice of the
service firm any more. Potential customers on foreign markets pick up
service offers for a domestic market and require the firm to deliver
internationally as well. Satellite television and especially the Internet have
291
 opened up services for consumers wherever these have access to those
technologies. Of course the firm can choose to ignore foreign interest in its
offerings, and perhaps lose new markets of considerable size, or it can
sometimes unexpectedly find itself an international service provider.
Specialty retailing, such as book stores and fitness equipment, are examples
of services that in this way have become international.
Hence, we can identify three general entry modes for service firms going into
foreign markets:
(1) client-following mode;
(2) market-seeking mode; and
(3) electronic marketing mode.
Of course, the three types of entry modes are not totally mutually exclusive.
A firm using the Internet as a form of electronic marketing mode can do this
deliberately to get access to international markets. This entry mode is, thus,
at the same time market seeking. Also, a firm following a client abroad may
have decided to take this opportunity to seek new markets actively.

Internationalization and the diversity of services

In the literature there has been a discussion about whether the
internationalization of services and goods differ from each other. Some
authors claim that the same factors influence the choice of entry mode by
service firms and manufacturers of goods (e.g. Terpstra and Yu, 1988;
Agarwal and Ramaswami, 1992). For example, Agarwal and Ramaswami
(1992) studied the choice of entry mode by equipment-leasing service
providers as compared to manufacturers of goods and found no differences.
The reason for this may be that this type of service does not require
permanent local presence in a foreign market (Ekeledo and Sivkumar, 1998).
However, other authors claim that entry modes for manufactured goods
cannot as such be transferred to services (e.g. Erramilli, 1990; Erramilli and
Rao, 1993). Others again conclude that the basic process of entering foreign
markets is the same for service firms as for manufacturers, whereas the
implementation of this process differs between these two types of firms
(Sharma and Johanson, 1987; Dunning, 1993).
Hard and soft services Erramilli (1990) has divided services for foreign markets into hard services
(e.g. architectural design, education, life insurance and music) and soft
services (e.g. food service, health care, laundry and lodging). Hard services
require limited or no local presence by the exporter and consumption can, to
a major extent, be separated from production. Conversely, soft services
production and consumption are to a major extent simultaneous processes,
and such services require major local presence by the service firm or a
representative that acts on its behalf. Services are of course very diverse,
ranging from what Erramilli labels hard services to soft services and include
a range of services somewhere in between. Following Erramilli's typology,
Ekeledo and Sivakumar (1998) propose that the foreign market entry mode
does not differ significantly between hard services and manufactured goods,
whereas it differs significantly between hard services and soft services.
In this article we do not intend to distinguish between various types of
services, and certainly not go into a normally unfruitful discussion about
whether there are differences between services and goods. What we see
today is that a growing number of manufacturing industries have to
vitalize the service elements of their offerings or add new services to

292 JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999


Five main strategies
Opportunity to expand
markets abroad
JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999
goods-based offerings in order to stay competitive. Hence, more and more
firms are becoming dependent on their understanding of how to manage
services and on their service management skills. Indeed, the line between
services and manufactured goods is becoming very blurred. The knowledge
of how to manage manufacturing firms and how to manage service firms,
respectively, are merging; however, in terms of services, not goods as it used
to be. In another context we have coined the term ``service competition'' for
this new emerging type of competitive situation facing an ever-growing
number of industries on domestic as well as international markets (GroÈnroos,
1990a). Hence, in reality, more and more firms and industries are becoming
service firms and service industries.
In the following sections of this article we discuss a typology of international
marketing modes for services, regardless of whether some of these modes fit
some types of services better than other types, and regardless of whether, as
far as the internationalization issue is concerned, some of these modes do or
do not distinguish services from manufactured goods.
Making services accessible abroad
A service firm that plans to start to market its services internationally has to
find a way of making its services accessible in the chosen foreign market.
Once this has been done, a local service offering has to be developed in the
new market (GroÈnroos, 1990b). Regardless of how much of the service can
be produced in a back office on the home market, some of the service
offering is always produced locally. This is true even for electronically-
marketed services. If nothing else, the local postal system becomes the final
local link in the service system.
Five main strategies for internationalizing services can be distinguished.
These are not mutually exclusive, and in some cases some of them will work
well for manufactured goods as well:
(1) direct export;
(2) systems export;
(3) direct entry;
(4) indirect entry; and
(5) electronic marketing.
Export strategies
Direct export of services may basically take place on industrial markets.
Consultants and firms repairing and maintaining valuable equipment may
have their base on the domestic market and whenever needed move the
resources and system required to produce the service to the client abroad.
Repair services on valuable equipment are often exported in this way. Some
consultants work in a similar fashion. No step-by-step learning can take
place as the service has to be produced immediately. Because of this, the risk
of making mistakes can be substantial.
Systems export is a joint export effort by two or more firms whose solutions
complement each others. A service firm may support a goods-exporting firm
or another service firm. For example, when a manufacturer delivers
equipment or turn-key factories to international buyers, a need for
engineering services, distribution, cleaning, security and other services is
often present. This gives service firms an opportunity to expand their
markets abroad. As the literature suggests, systems export is the traditional
293
 mode for service export. For example, advertising agencies and banks have
extended their accessibility abroad because of their clients' activities on
international markets. In systems export the services are mainly marketed in
industrial markets abroad.

Entry strategies
Direct entry means that the service firm establishes a service-producing
organization of its own on the foreign market. For manufactured goods in the
first stage of a learning process, a sales office can be such an organization.
For a service firm, a local organization normally has to be able to produce
and deliver the service from the beginning. The time for learning becomes
short. Almost from day one the firm has to be able to cope with problems
with production, human resource management and consumer behavior. In
addition, the local government may consider the new, international service
provider a threat to local firms and even to national pride.
A central issue is to keep In order to decrease the potential problems with a direct entry strategy,
key people instead of establishing a new organization of its own the internationalizing
firm can acquire a local firm operating on the same service market. This way
one gets access to knowledge about the market as well as about how to
manage the service operation in the foreign environment. A central issue in
such an acquisition is to keep the key people in the acquired firm. Without
them the internationalizing service firm may easily find itself in the same
position as when establishing a totally new operation.
Another option is to form a joint venture with a local firm, which offers the
local partner new growth opportunities at the same time as it gives the
international partner much-needed local know-how. Direct entry can be used
for internationalizing consumer services as well as services for industrial
markets. The same goes for the rest of the internationalizing strategies
discussed in this article.
Indirect entry is used when the service firm wants to avoid establishing a
local operation that is totally or partly owned by itself. Nevertheless, the firm
wants to establish a permanent operation in the foreign market. A consulting
firm can, for example, through a licensing agreement give a local firm
exclusive rights to use the professional concept of the firm. This of course
requires that exclusive rights can be guaranteed. In the lodging business and
in the restaurant and food service industries; franchising is an often used
concept for indirect entry into a foreign market. Local service firms get the
exclusive right to a marketing concept, which also may include rights to a
certain operational mode, and in this way the concept can be replicated as
much as existing demand allows all over the foreign market. The
internationalizing firm as the franchisor gets the local knowledge which the
franchisees possess, whereas franchisees get an opportunity to grow with a
new and perhaps well-established concept.
Use of middlemen In a sense, franchising resembles indirect export of manufactured goods,
where the exporter makes use of middlemen on the local market who have
the local knowledge needed to penetrate the market. Another form of indirect
entry is management contracts, which often are used, for example, in the
lodging business.
As far as the need for market knowledge is concerned, indirect entry is
probably the least risky of the internationalization strategies discussed so far.
Conversely, the internationalizing firm's control over the foreign operations
is normally more limited when using this entry strategy.

294 JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999


Language barriers
JOURNAL OF SERVICES MARKETING, VOL. 13 NO. 4/5 1999
Electronic strategies
Electronic marketing as an internationalizing strategy means that the service
firm extends its accessibility through the use of advanced electronic
technology. The Internet provides firms with a way of communicating its
offerings and putting them up for sale, and a way of collecting data about the
buying habits and patterns of its customers and using network partners to
arrange delivery and payment. The electronic bookstore Amazon.com is a
good example of a firm internationalizing its services using electronic
marketing. When launching this bookstore concept, it had to take into
account the interest in its services that would automatically develop outside
national borders. TV shops are examples of other ways of internationalizing
services using advanced technology, in this case satellite television. In
Europe, for example, music and fitness equipment are offered through
satellite television services.
When using electronic marketing, the firm is not bound to any particular
location. The service can be administered from anywhere on the globe and
still reach customers throughout a vast international market who, for
example, are connected to the Internet or exposed to satellite television
broadcasting. As a matter of fact, the firm cannot avoid creating interest in its
offerings outside its local or national market. Of course, language barriers
and electronic illiteracy may hinder the electronic offer from being used.
However, even a firm that chooses to internationalize using electronic
marketing cannot manage its service operations totally on its own. On
foreign markets it has, for example, to rely on at least postal and delivery
services. The possibility for the service firm to control such network partners
may be very limited.
Concluding remarks: will customers accept foreign services
Regardless of which entry mode the internationalizing service firm uses, the
local customers have to accept the services of a firm with a foreign
background. In addition, governments of countries abroad sometimes resist
foreign service firms. There is always a possibility of ethnocentric tendencies
(Sharma et al., 1995) among consumers on the markets abroad. Such
tendencies may become a problem for the internationalizing firm.
Ethnocentrism means that consumers prefer domestic goods or services,
because of nationalistic feelings. According to Sharma et al. (1995) openness
to foreign cultures may support the acceptance of goods and services with a
foreign origin whereas, for example, patriotism and conservatism may keep
consumers from buying. However, a recently reported study in the service
sector by de Ruyter et al. (1998) demonstrates that, in Europe at least, the
outlook for foreign services is promising. People who are more open to other
cultures are less ethnocentric towards services. More importantly, younger
persons and more educated persons turned out to be significantly less
reluctant to accept foreign services than others. When growing older,
consumers with such tendencies can be expected to remain open to
international services. Also, as the educational level continues to increase,
the degree of ethnocentrism can be expected to decrease.
Governments that object to international service firms may severely
hinder foreign firms from entering the market with their services. In such
cases the internationalizing firm may have to develop relationships with
governmental institutions and treat them as their first customers
(Gummesson, 1998).
295
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&

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