COLOGNE BUSINESS SCHOOL (CBS)

Internationalisation of Service Firms- an identification of service unique

characteristics and their implications for the choice of foreign market entry mode

Bachelor's Thesis in partial fulfilment of the requirements for the degree of

BACHELOR OF ARTS (BA)in International Business

with specialisation in Management Consulting

Tobias Lukaschek Student-No. 1508019

Advisor: Mrs Zmuda

Cologne, May, 2011

Table of Contents

1. Introduction........................................................................................................... 12. Services in a World Economy............................................................................... 33. Factors behind the Growth of Services................................................................ 53.1 Market Related Factors...................................................................................... 53.2 Company Internal Motives.................................................................................. 83.2.1 Distinction of Motives......................................................................................103.2.1.1 Proactive Motives......................................................................................... 113.2.1.2 Reactive Motives.......................................................................................... 123.2.1.3 Summary...................................................................................................... 154. Services in Today’s Economies............................................................................ 164.1 Common Division of Economic Activities........................................................... 164.2 Criticism on Division of Economic Activities....................................................... 174.3 Attempts to improve Division of Economic Activities.......................................... 185. Services in Statistics............................................................................................ 205.1 Service Statistics for Germany........................................................................... 205.1.1 Share of Labour Force by Sectors.................................................................. 21

5.1.2 Contribution to Gross Domestic Product......................................................... 22

5.2 Service Statistics for Europe and the World....................................................... 23

5.2.1 Service Statistics for EU countries.................................................................. 245.2.2 Service Statistics for OECD countries............................................................. 25

6. Services................................................................................................................ 276.1 Defining Services............................................................................................... 276.2 Constitutive Features of Services and their Implications on Marketing.............. 296.2.1 Intangibility....................................................................................................... 306.2.2 Inseparability................................................................................................... 316.2.3 Heterogeneity.................................................................................................. 326.2.4 Perishability..................................................................................................... 336.2.5 Summary......................................................................................................... 347. Borderline between Goods and Services............................................................ 357.1 Goods-Service Continuum by Shostack............................................................. 367.2 Goods-Service Continuum by Graf.................................................................... 387.3 Summary............................................................................................................ 398. Foreign Market Entry Modes................................................................................ 408.1 Classification Entry Modes................................................................................. 418.2 Description of Entry Modes................................................................................ 428.2.1 Non-Equity Modes........................................................................................... 438.2.1.1 Exporting...................................................................................................... 438.2.1.2 Licensing........................................................................................... ........... 43

8.2.1.3 Franchising................................................................................................... 438.2.1.4 Management Agreement.............................................................................. 448.3 Description Equity Modes................................................................................... 448.3.1 Joint Ventures...................................................................................... ........... 448.3.2 Foreign Direct Investments..............................................................................459. Foreign Market Entry Mode Selection.................................................................. 469.1 Entry Mode Selection Research......................................................................... 479.2 Entry Mode Selection for Service Firms............................................................. 489.2.1 Conceptualisation by Vandermerwe and Chadwick........................................ 489.2.1.1 Classification by Clustering.......................................................................... 499.2.1.1.1 Sector 1: Low Goods / Lower Interaction................................................. 509.2.1.1.2 Sector 2: Medium goods / Lower Interaction............................................. 509.2.1.1.3 Sector 3: High Goods / Lower Interaction................................................. 509.2.1.1.4 Sector 4: Low Goods / Higher Interaction................................................. 509.2.1.1.5 Sector 5: Medium Goods / Higher Interaction........................................... 509.2.1.1.6 Sector 6: High Goods / Higher Interaction................................................. 509.2.1.2 Correlation between Clusters and Entry Modes........................................... 5110. Conclusion..........................................................................................................5211. Appendix............................................................................................................. 5612. Bibliography........................................................................................................ 61

Table of Figures

Figure 1: Maslow’s Pyramid of Need and its relationship to disposable income

Figure 2 : Stimuli, Motives and Motivation

Figure 3: Development of Labour Force Share by Sectors in Germany

Figure 4: Development of Service Sector’s Contribution to German GDP

Figure 5: Development of Service Sector’s Contribution to GDP in EU countries

Figure 6: Development of Service Sector’s Contribution to GDP in OECD countries

Figure 7: Goods-Service Continuum (Shostack)Figure 8: Goods-Service Continuum (Graf)

Figure 9: Hierarchical Model of Entry Modes

Figure 10 : Foreign Entry Mode Continuum

Figure 11 : Six-Sector-Matrix

Figure 12 : Service Clusters and Applicable Entry Modes

1. Introduction

Many publications focus on strategies and operational functions and their application in industries such as agriculture and manufacturing, whereas only few have attempted to

examine services from such a perspective. The reason for this neglect reflects the complex nature of services, their unclear boundaries and shifting structures, their

intangible outputs, the perceived social and economic significance of services and their inherent resistance to the direct transfer of manufacturing models of management

(Nankervis 2005: 1).

This textual extract from Nankervis’ publication Managing Services published in 2005 summarises and marks the starting point of my Bachelor Thesis entitled Internationalization of Service Firms - an identification of service unique characteristics and their implications for the choice of foreign market entry mode by which I aim to verify the service sector’s impact in developed countries as well as identify services’ unique characteristics and their consequences on the choice of foreign market entry modes for service firms.

My Bachelor Thesis is structured into two coherent and mutually dependent parts, each led by a hypothesis.

Part One (Chapter 1 - 5) : In his publication Service Is Front Stage from 2006 Teboul states ”we are all in services now, more or less”. He argues that the tertiary sector nowadays accounts for the most important sector of economic activities measured in terms of contribution to gross domestic product. On the basis of his statement I formulate Hypothesis 1: The tertiary sector has nowadays evolved to be the most significant economic sector in developed countries’ economies. Part One of my paper will therefore present the background and evidence to verify Hypothesis 1.

Part Two (Chapter 6 - 9) : In his publication Internationalisierung von Dienstleistungen [Internationalisation of Services] Bruhn (2005) indicates that the main focus of scientific research in relation to internationalisation decisions has been on internationalising goods and has largely neglected service. In this context, Javalgi et al. (2003) question and doubt the transferability and applicability of these goods-based results to the internationalisation of services due to their unique constitutive features. On account of these academics’ statements I formulate Hypothesis 2: Service constitutive features and their implications call for distinct considerations in foreign market entry mode selection. Part Two my paper therefore sets out to define services on account of their constitutive feature and delimit services from goods in both their nature as well as

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their marketing approach. Furthermore, I aim will explore the choice of foreign market entry mode for service firms.

For the purpose of compiling this paper I employ books, articles from edited books as well as article from journals and internet sources in rare cases.

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2. Services in a World Economy

“The labour of manufacturer fixes and realises itself in a particular subject or vendible

commodity [...] on the contrary, the labour [of service providers] does not fixe and

realises itself in a particular subject or vendible commodity, [it] generally perishes in the

very instant of [its] performance, and seldom leaves any trace of value behind” (Smith

1776: 197).

“Services and other goods, which pass out of existence in the same instant that they

come into it, are of course not part of the stock of wealth”

(Marshall 1890: 47).

In their sentiments both Smith and Marshall discredit the significance and the role of

services in economies by arguing that services account for “unproductive labour” that

does not contribute to the creation of wealth within economies. (Smith 1776: 197, &

Marshall 1890: 47).

However, it is necessary to recognise that Smith and Marshall published these opinions

in the 18th and 19th centuries respectively. Compared with today’s givens the above

statements of these renowned economists are questionable and academics nowadays

would have to disagree with them. This indicates that a change must have taken place

(Desmet & Van Dierdonck 1998: 45).

Following Desmet & Van Dierdonck (1998: 45) “services nowadays account for the

majority of value added in terms of gross domestic product and share of labour force in

“most countries’ economies”.

Over the past decades the global economy has been subject to profound changes that

are generally summarised as globalisation1.

These changes are reflected by the increasing international interrelation of economies

and a modified division of labour amongst economies and companies.

Globalisation is mainly triggered by the combined effects of progressing trade

liberalisation, proceeding deregulation of financial-, goods- and factor markets, an

increasing integration and involvement of developing countries in international trade,

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1 Globalisation summarises the worldwide movement towards economic, financial, trade and communications integration and refers to the process of firms establishing activities or operations in other parts of the world (O’Connell 1999: 145-146).

the existence and spread of modern information- and communication technologies as

well as declining transport- and transaction2 costs (Graf 2005: 2-3).

On the basis of these developments the internationalisation of firms’ operations has

become a guideline to many companies in order to claim their position for markets and

production advantages in the context of international competition.

On account of that, firms can nowadays establish export relationships or position

themselves by means of branches, subsidiaries and/or acquisition of existing

companies abroad (Graf 2005: 1-2).

The significant characteristic associated with globalisation worth exploring in this

context is the global rise of the service sector’s relevance within modern economies.

Many studies conducted by scholars have validated and described these developments

as a conversion from “industrialised- to service societies” in most European countries

(Graf 2005: 2).

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2 Transaction costs are the expenses in time and resources that are associated with the process of buying and selling other than the price (McAuliffe 1999: 202-203).

3. Factors behind the Growth of Services

Desmet & Van Dierdonck (1998: 49) state that “it is hard to pinpoint one determining

factor in the service sector’s growth” and they conclude that “a combination of different

factors have all played a part in the sector’s increasing importance”.

These factors can be divided into “market related factors” as Bruhn (2005: 8) coins

them and company internal motives.

3.1 Market Related Factors

Graf (2005: 3) argues that the proceeding reduction and clearance of trade barriers,

that had previously held back the transfer of services, has greatly contributed to the

expansion and increase in services related economic activities.

This is what Bruhn (2005: 5) describes as “deregulation and liberalisation of

international trade” which was heavily lead and globally enforced by the World Trade

Organisation (WTO)3 with the aim of enabling trade of services and by that the

accession of attractive foreign market for service providers, , as he reveals.

The WTO’s efforts resulted in the signing of a multilateral set of rules, the so called

General Agreement on Trade Services (GATS), in 1996, that globally promote the

internationalisation of services (Bruhn 2005: 5-6; & Graf 2005: 3).

Further, Graf (2005: 3) appoints the international “approximation of service related

needs” as a market related factor driving the service sector’s growth globally, while

Bruhn (2005: 7) explains that consequently the international similarity in needs

increases the demand for international services.

Desmet & Van Dierdonck (1998: 49-51) describes that the traditional family structure is

in the process of being increasingly replaced by dual-income families in which both,

mother and father work. This globally spread development reduces available time to

take care of everyday duties. As Desmet & Van Dierdonck (1998: 49-51) summarise

this increasingly forcing people to outsource activities, which they capture as “doing

each other’s laundry”. They further summarises that outsourcing becomes possible

while necessary at the same as economies become wealthier and people within an

economy have higher disposable incomes and less less time.

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3 The World Trade Organisation (WTO) was founded in 1995 and formed as an independent special organisation of the United Nations in order to promote and regulate international trade (Gabler 2009).

The correlation between income and demand patterns was observed and

conceptualised, by the statistician Ernst Engels, in what is known as the Engels’ Law

theorem 4.

Engels’ Law predicates that when “people are poor, they have to allocate all or a large

part of their income to the necessities of life - namely food and shelter”. Further Desmet

& Van Dierdonck (1998: 49-51) summarise that as soon as “incomes rise, people

spend more on food and shelter, but not all of the increase is spent on such needs,

since these needs can be saturated” and in effect, “the relative proportion of total

spending on food and shelter diminishes as income increases”. Hence, “instead of

spending their extra income on food, people spend it on clothing, recreation, personal

care, travel and luxury items” (Graf 2005: 3; & Desmet & Van Dierdonck 1998: 49-51).

Maslow’s Pyramid of Needs is a motivation theory based on a hierarchical order of

people’s needs according to their importance. According to Maslow the prioritisation for

human needs is as follows:

1. physiological needs

2. security needs

3. social acceptance needs

4. appreciation needs

5. self-realisation needs

Maslow’s Pyramid of Needs theory suggest that people satisfy needs in the fixed

sequence starting with physiological needs and followed by safety needs, social needs,

esteems need and self-actualisation needs. He also argues that there is a point of

saturation for each need (Pride et al. 2005: 283-284).

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4 Engels’ Law is an economic theorem that argues that the proportion of income spent on food decreases as income increases (Braun & Segura 2004: 71).

Desmet & Van Dierdonck (1998: 50) choose to combine both Engels’ Law and

Maslow’s pyramid of needs as an approach to explain the rise in demand for services

in economies.

Figure 1 : Maslow’s Pyramid of Need and its relationship to disposable incomeSource: Own illustration following Desmet & Van Dierdonck 1998: 50

Applying both theories in combination, as visualised in Figure 1, it can be read that as

economies become wealthier, meaning that disposable income rises, people are in the

position to meet and saturate their physiological- and security needs. As a result, they

tend to pursue needs further up the pyramid. These needs higher up the pyramid in

return tend to be increasingly service related. This correlation is visualised and

indicates that the relative demand for goods outperforms the demand for services up to

a certain point; as disposable income rises and basic needs are fulfilled, however,

this relation changes and the demand for services, relative to goods, carries more

weight. Hence, the demand for services and the service sector’s relevance increases,

while the relative proportion of income utilised for food and shelter lessens (Graf 2005:

3; Desmet & Van Dierdonck 1998: 49-51).

The social changes that lead to a higher demand for services within societies are

further enhanced by the demographic increases “in life expectancy”. The “greying

population” hikes demand for services such as “nursing homes, health care services

and specialised travel agencies” (Desmet & Van Dierdonck 1998: 49-51).

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Another factor that impinges on demand for services in the same manner is “the

increasing complexity of life” that has created demand for services such as legal and

tax consultants (Desmet & Van Dierdonck 1998: 49-51).

“Technological progress” such as information- and communication capabilities have

likewise supported the global rise of services by making a contribution to the

“diversification of services available and towards the creation of new services” (Bruhn

2005: 6-7; & Van Dierdonck 1998: 51).

Nevertheless, Van Dierdonck (1998: 49-51) adds without intending to diminish

technologies’ influence that there is no direct correlation between it and “the rising

importance of services”. Instead, he concludes that technological advancements have

rather played a supporting role in the economic gain of services.

3.2 Company Internal Motives

Van Dierdonck (1998: 3-10) argues that firm’s stimuli, motives and drivers to internationalise business activities are very similar and further he states that “going international [for companies] is leveraging a competitive asset5” for both manufacturing and service firms.

Van Dierdonck (1998: 409-410) argues that “companies by nature want to grow” and points out that a company can achieve growth either by diversification within its domestic market or by expanding its business activities to foreign markets. To his statement, Van Dierdonck (1998: 409-410) adds that in many cases growth may be simpler to realise by selling the same product in a different market as opposed to broadening a firm’s portfolio by developing and launching different products within the company’s domestic market. Nevertheless, Van Dierdonck (1998: 409-410) indicates that growth alone may not be the only reason for firms to internationalise their business activities. He concludes that by growing bigger, a firm will also be better able to exploit economies of scale6 and scope7 and subsequently form competitive advantages over

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5 An asset is an economic resources owned by a firm. Assets include productive, tangible as well as intangible items that help generate income (Nickels et al. 2008: 464-466).

6 Economies of scale exists when increasing inputs causes outputs to rise by more than the change in inputs. Expressed in terms of costs for a single product, the average total cost per unit declines as output increases when there are economies of scale (McAuliffe 1999: 58-59).

7 Economies of scope exists when a company can produce two or more products at lower cost than by producing them separately (McAuliffe 1999: 59-60).

its competitors by improving its operations supported also by experiences and expertise gathered during the process of internationalization.

Hübner (1996: 75-80) choses a more systematic and analytical method to contour a firm’s motivation to expand its business activities to foreign markets. He argues that “motives and the the resultant motivation are reason and drive to offer a service [or good] in foreign markets”. In addition, he states that there is a difference worth while noting between motives and motivation. He describes a motive as a single reason or impulse to expand internationally while he points out that the motivation for a company to internationalize reflects all single motives combined.

In the same vein, Sharma (1991: 50) summarises his empirical study on companies’ internationalization motives by concluding that “no single reason was sufficient to tell the whole story. It is rather the case that each firm had a number of different reasons for going abroad”.

Likewise, Czinkota and Ilkka (2004) approve by stating that “in most business activities, one factor alone rarely accounts for any given action” and that “usually a mixture of factors results in firms taking a step in a given direction”.

Hübner (1996: 75-80) expands the model-like idea of motives and motivation by a thirddimension. According to Hübner a stimulus is what enables a motive in the first place and therefore triggers a chain reaction consisting of stimuli, motives and motivation with regard to a company’s internationalization desire, as illustrated in Figure 2.

Figure 2 : Stimuli, Motives and MotivationSource: Own Illustration following Hübner 1996: 75-80

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In return a stimulus towards internationalization itself can be triggered by any internal or external factor, as Hübner (1996: 75-80) adds. In principle thus there are internal and external sources that can be understood as origin of stimuli and motives. These internal and external stimuli can each be broken down into stimuli that act as a pull-factor like for instance attractive market condition abroad, whereas stimuli can likewise act as a push-factor such as unfavourable market conditions in the domestic market or country with reference to a firm’s internationalization process (Hübner 1996: 75-80).

3.2.1 Distinction of Motives

Hübner (1996: 75-80) believes it to be useful to subdivide motives according to their unique criteria into practical categories. He suggests that one useful partition is to subdivide motives into defensive and offensive motives.

In support of this view Dahringer (1991: 5-17) points out the relevance of such a subdivision into defensive and offensive motives by manifesting that “whether the motives are defensive or offensive largely determines the firm’s commitment to global expansion, the resources allocated to such expansion, and the way in which new markets are entered”.

Scholars such as Czinkota & Ilkka (2004: 225-230) and Hollensen (2007: 42-53) favour a subdivision that splits motives into proactive and reactive nature. According to them, such a differentiation illustrates whether a firm proactively searches for stimuli or whether it reacts to a stimulus once its impulse is powerful enough. This differentiation yields the understanding that an active search for internationalization stimuli or motives is often connected to a greater risk tolerance by the firm (Hübner 1996: 75-80).

Hollensen (2007: 42) states that “proactive motives represent stimuli to attempt strategy change, based on the firm’s interest in exploiting unique competences or market possibilities”. In contrast, he describes reactive motives as an indication “that the firms reacts to pressures or threats in their home market or in foreign markets and adjusts passively to them by changing their activities over time”.

Czinkota & Ilkka (2004: 226-227) relate proactive motives to proactive behaviour and reactive motives to reactive behaviour. On the basis of that they frankly conclude that “proactive firms go international because they want to, while reactive ones go international because they have to”.

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3.2.1.1 Proactive Motives

Czinkota & Ilkka (2004: 226-230) and Hollensen (2007: 42-48) agree that proactive motives are made up of profit and growth goals, managerial urge, technology competence and/or unique products, foreign market opportunities and/or information, economies of scale and tax benefits. Czinkota & Ilkka (2004: 227) describe profit and growth goals as the most stimulating of all proactive motives to trigger internationalization. However, Czinkota & Ilkka (2004: 227) and Hollensen (2007: 45) agree that the forecasted and perceived profitability tends to vary quite often from the profitability actually generated from foreign market activities. In addition, the three editors agree that in particular initial profitability can be considerably low and they raise the issue that, despite thorough planning sudden influences can drastically change expected profitability even if estimates are based on careful market evaluation.

Managerial urge is also considered to be a proactive motive to expand a company’s business activities abroad. Czinkota & Ilkka (2004: 227) and Hollensen (2007: 43) define managerial urge as “a motivation that reflects the desire, drive and the enthusiasm of management towards global marketing activities”. Further the cited scholars point out that managerial urge oftentimes simply reflects entrepreneurial spirt of continuos growth and market expansion. They highlight the fact that this desire can be substantially influenced by managers liking the idea of being part of a company that operates internationally. Besides, working for an internationally operating firms yields a good reason for international travel (Czinkota & Ilkka 2004: 227; & Hollensen 2007: 43).

Technology competence or a unique product are often considered as one proactive motive to internationalize throughout literature due to their similarity in reasoning. Both Czinkota & Ilkka (2004: 227) and Hollensen (2007: 43-44) agree that profitability issues are similar to those pointed out for profit and growth goals in the sense that real and perceived advantages may in fact be offset. Hollensen (2007: 43-44) describes how firms tend to believe their product or service is unique. Unfortunately, this does not always turn out to be true in the international market. However, if the firm’s product or service actually proves to be unique and there is market potential, thus either technology competence or a unique product can “provide a sustainable competitive edge and result in major business success abroad” (Hollensen 2007: 43-44). Provided a firm has a unique competence in its domestic market it may be advisable to consider the opportunity costs incurring with the internationalisation of their business

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activities, which often supports the idea of entering foreign markets, since the opportunity costs of exploiting existing competences abroad may be comparatively low (Hollensen 2007: 43-44).

Exclusive market information yielding foreign market opportunities is another proactive stimulus or motive towards internationalization that is worthwhile mentioning in this context. This motive is comprised of knowledge about foreign customers, market places or market situations resulting from international research a firm conducted, or specials contacts a firm may have abroad (Czinkota & Ilkka 2004: 227).Czinkota & Ilkka (2004: 227) stress the fact that this motive represents a competitive advantage over competitors that is however transient, since competitors may also acquire this knowledge or may simply follow the first mover into foreign markets. Another proactive motive for companies to expand their business activities beyond their domestic market is the prospect of economies of scale. Czinkota & Ilkka (2004: 228) describe economies of scale as “a major proactive motivation”. Hollensen (2007: 44) adds that economies of scale enable a firm to “climb more rapidly on the learning curve” due to increased outputs and the exposure to international experiences. Achieving economies of scale through expanding into foreign market is so desirable for companies, since it does not only yield greater turnover and profit, but in addition to that, turning over a greater number of goods or service can lead to a decline in average costs per good sold or per service delivered. Hence, economies of scale make a firm more competitive domestically and internationally at the same time (Czinkota & Ilkka 2004: 228; & Hollensen 2007: 44).

Equally, tax benefits are considered to be a motive that proactively encourages companies to pursue internationalisation opportunities. Czinkota & Ilkka (2004: 227) acknowledge the relevance of tax benefits and point out that “[tax benefits] have historically [...] played a major motivating role” to encourage firms to expand internationally.

3.2.1.2 Reactive Motives

As indicated above there is an existing consent amongst scholars that reactive motives also contribute to the internationalisation of companies. Reactive motives can be summarised as influences that cause “firms to respond to changes and pressures in the business environment” (Czinkota & Ilkka 2004: 228). Czinkota & Ilkka (2004: 226-230) as well as Hollensen (2007: 42-48) share the opinion that reactive motives are composed of competitive pressure, domestic market saturation and size, overproduction or excess capacity, unsolicited foreign orders and extend sales of seasonal products.

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Competitive pressure is the prime form of such reactive motives and is characterised by a company’s fear of losing market share to competitors who expand internationally and thereby may establish economies of scale which in return may lead to cost disadvantages to a firm that limits its operations domestically. Equally, it may strengthen a competitor’s position domestically as well as internationally regarding aspects such as market share and market presence. In the same vein, there is a agreement amongst scholars that firms that move first into a foreign market have a greater chance of capturing market share as opposed to being in the position of having to win over customers after a competitor with similar or equal competences has successfully settled in a foreign market (Hollensen 2007: 44). Czinkota & Ilkka (2004: 228) point out that this understanding also bears the danger of firms entering the international market “head over heels” when it is becomes evident that competitors are preparing and beginning to internationalize. For this reason, Czinkota & Ilkka (2004: 228) emphasise the fact that a “quick entry may result in a similarly quick withdrawal once the firm recognises that its preparation has been insufficient”.

Firms may also be forced to consider international expansion if it turns out that their home market is too small in the sense that there is too little market potential in order to establish “sufficient economies of scale and scope” enabling a firm to be able to hold its ground against competitors (Hollensen 2007: 46). Likewise, a saturated domestic market may lead a company to conclude that an international expansion is necessary to meet its objectives, whereby market saturation can be determined either by sales volume or market share. Besides, goods or services a firm distributes and sells in its home market may also be at the “declining stage of their [...] life cycle” on which basis companies may opt to introduce such products in foreign markets that yield greater market potential and where there are fewer or no competitors in order to sustain their position (Hollensen 2007: 46). In the past there have been cases where the approach of prolonging the life cycle of a good or a service by expanding into the international market has been rewarded with great success as opposed to firms “attempting a push-back of the life cycle process” in their home market (Hollensen 2007: 46). This is due to the fact that especially developing countries tend to lag behind developed countries in terms of demands, needs and disposable income so that goods and services that are declining in demand may be requested in other markets, as Czinkota & Ilkka (2004: 228) & Hollensen (2007: 46) describe.

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Overproduction and excess capacity can also act as a reactive motivative that pushes companies towards entering foreign markets. A company suffering from incorrectly forecasted domestic demand that has as a result treasured up inventories above desired levels, may enter foreign markets as Czinkota & Ilkka (2004: 228) argue. Also they point out that this practise has been historically relevant because markets abroad oftentimes are not simultaneously affected by economic downturns and therefrom resulting demand fluctuations. However, Czinkota & Ilkka (2004: 228) also add that expansion triggered and motivated by overproduction usually is undertaken on a short terms basis as a “safety-valve activity” as opposed to a corporate strategy. According to Hollensen (2007: 46) excess capacity can be a “powerful motivation” to expand a firm’s business activities abroad in the case that the utilisation degree of a company’s assets including a firm’s man power is not working to capacity. Under these circumstances unexploited capacity can be employed to produce goods and deliver services for or in foreign markets. Czinkota & Ilkka (2004: 228) present evidence that companies can thereby allocate fixed costs to a greater number of outputs and reduce costs per good manufactured or service delivered, besides generating more revenue. As a result this can have a positive affect that enables companies to offer attractive pricing schemes in foreign markets in order to quickly gather market share (Czinkota & Ilkka 2004: 228-229; & Hollensen 2007: 46-47).

Moreover, the increasing global intertwining of economic activities may lead to foreign orders for a good or service a company originally intended to supply solely within its domestic market. Out of this circumstances a firm may decide to react to such an impulse. Amongst scholars such “unsolicited foreign orders” are understood to be reactive in nature, since companies react on account of an impulse as soon as it is s t r o n g e n o u g h a n d a s a r e s u l t t h e r e o f “ e x p a n d [ . . . ] o p e r a t i o n s internationally” (Hollensen 2007: 47).

Extended sales of seasonal products are likewise considered to be a reactive motive to expand business activities abroad. This motive reflects on the fact that there may be seasonalities in demands that may differ from a firm’s domestic market to foreign markets. The extended sales of seasonal products may act as a pull factors on companies that aim to “achieve a more stable demand over a year” (Hollensen 2007: 47).

In the context of stimuli and motivations towards the internationalisation of companies the concept of geographical and psychological distance is worth while outlining (Hollensen 2007: 47).

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Czinkota & Ilkka (2004: 229) highlight that “geographic closeness to the foreign market may not necessarily translate into real or perceived closeness to the foreign customer” and further they point out that “cultural variables, legal factors” as well as “other societal norms” can make a firm realise that foreign markets that are geographically close, can turn out to be psychologically distant and vice versa. Also, Czinkota & Ilkka (2004: 229) advise companies that plan an internationalisation to “begin [...] by entering the psychologically closer markets first in order to gather experiences before venturing into markets that are [psychologically] farther away.” In the same vein Czinkota & Ilkka (2004: 229) raise the issue that is is vital to chose objective measures to determine how close a foreign market is in a psychological sense to the firm’s domestic market because as they argue “some of the distance seen by firms is based on perception rather than on reality.”

3.2.1.3 Summary

According to Czinkota & Ilkka (2004: 229-230) an “overall contemplation” of proactive and reactive motives should include the remark that companies that proved to be successful in their internationalisation are driven by proactive and internal factors being either profit and growth goals, managerial urge, technology competence and/or unique products, foreign market opportunities and/or information, economies of scale and tax benefits (Czinkota & Ilkka 2004: 226-230; & Hollensen 2007: 42-48). In this context Czinkota & Ilkka (2004: 229-230) suggest that the difference between a proactive and a reactive firm can be best summarised by stating that “proactive firms are more likely to solicit their first international marketing order, whereas reactive firms frequently begin international marketing activities after receiving an unsolicited order from abroad”. This statement takes up and relate well to an earlier quote by Czinkota & Ilkka (2004: 226-227) in which they argue that “proactive firms go international because they want to while reactive ones go international because they have to”.

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4. Services in Today’s Economies

”We are all in services now, more or less” (Teboul 2006: 23).

Teboul’s statement makes the conjecture that services play a major role in people’s

lives and today’s economies. Also the way his testimony is phrases is indicative of that

services may not have always played such an important role.

However, Teboul (2006: 4) recognises that prior to “any analysis [of services”], we are confronted with the complex issue of [a service] definition” in the first place to be in the position to measure and quantify service activities.

According to Teboul (2006: 4) who refers preliminary to an issue of The Economist from 1985 to define services as intangible products that can be “sold in trade” but “cannot be dropped on your foot”.

The Economist’s definition rightly hints at the complex nature of service, since services in fact can vary greatly in terms of their make-up. This poses the question of whether the definition given by The Economist is actually applicable to all services. Thus, Tabour concedes with foresightedness that “differences of opinion rapidly surface” when an all-embracingly correct and applicable definition of services is attempted (Tabour 2006: 4).

This paper will deal with the issue of defining services in a later chapter. Instead, the following elaborations will focus on the common division of economic activities for the purpose of statistical surveys.

4.1 Common Division of Economic Activities

In economics, the idea of subdividing economic activities into three high-level sectors has established itself and nowadays forms the basis of statistical data all over the world (Pierenkemper 2009: 134).

The high-level division sub-classifies economic activities into a primary sector that accounts for “the production of goods directly from natural resources” meaning the extraction of raw materials and fishing, a secondary sector that “modifies material goods” being manufacturing and a tertiary sector that summarises “activities which do not produce or modify material goods” (Illeris 2007: 20).

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This high-level classification of economic activities was already inherent in the writings of Adam Smith, Jean-Baptiste Say as well as Karl Marx and was finally entrenched by Fisher (1935), Clark (1940) and Fournastié (1949) in the form of the ‘three sector hypothesis’8 (Illeris 2007: 20; & Staroske 1995: 1-17).

The basis for the devision of economic activities is the believe that these three sectors are idiosyncratic and distinct from each other regarding their production conditions (Pierenkemper 2009: 134).. In more detail, the primary sector combines all industries that are engaged in production or extraction of natural resources such as crops, oil, ores, agriculture, forestry, fishery and mining. The secondary sector summarises all industries that engage in chemical, mechanical or physical transformation of materials, substances or components into tangible consumer or industrial goods. The tertiary sector, also referred to as the service sector, is used as a collective term composed of economic activities that do not produce material products9 (Pierenkemper 2009: 134).

This subdivision of economic activities is used, inter alia, to illustrate the composition of gross domestic product (GDP) and share of total labour force by sector in economies to describe their individual relevance and impact (Tabour 2006: 4-7).

4.2 Criticism on Division of Economic Activities

A question that has been extensively discussed in the literature is whether the three sectors division constitutes the best high-level classification and division of economic activities. This explicitly raises the question of whether the tertiary sector, representing services, is an appropriate category (Illeris 2007: 19).

Generally, it is regarded to be a problem that the boundaries between the three categories are undoubtably blurred, especially though it seems to be difficult to draw a clearcut line between the secondary and tertiary sector (Illeris 2007: 19).

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8 The three-sector hypothesis is an economic theory which divides economies into three sectors of activity and predicts their development (Pierenkemper 2009: 134).

9 A product is any physical goods or services that satisfy a want or a need and is therefore used as a collective term for both goods and services throughout this paper (Nickels et al. 2008: G-17).

However, it is difficult to find characteristics or features which all services and no other economic activities hold, since the activities aggregated within the tertiary sector tend to be heterogeneous in nature (Illeris 2007: 20).

Illeris (2007: 20) stresses the fact that it is unavoidable for high-level categories to be heterogeneous and acknowledges that the high-level categories cannot be all-embracingly accurate.

However though, other scholars take up the position that the traditional division of economic activities and especially the concept of services is inappropriate due to the heterogeneity of business activities accumulated within a sector in particular regarding the tertiary sector (Illeris 2007: 20).

Nevertheless, Illeris (2007: 21) admits it is rightly argued that manufacturing activities are and tend to become even more similar to services, while services are becoming increasingly industrialised or standardised at the same time. This approximation of good and services, as he points out, further increases differentiation issues. Despite this criticisms, Illeris (2007:21-22) emphasises on the importance of high-level classifications and acknowledges that it may be impossible to make them clearcut and totally satisfactory.

In effect, Illeris (2007: 22) suggest that more homogenous categories must then be found on lower hierarchical levels.

4.3 Attempts to improve Division of Economic Activities

Due to the above mentioned issues of distinguishing the three sectors of economic activities clearly and unequivocally from each other, numerous author have suggested alternative or additional divisions.

Gottmann (1961: 75-80) suggests to subdivide the tertiary sector by extracting sophisticated and highly qualified services out from the tertiary sector in order to summarise such services separately in a “quaternary sector. However, this suggestion had little success and did not prevail (Illeris 2007: 20-22).

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A similar attempt regarding the methodology was formulated by Porat (1977: 54-63). Likewise, he suggests to expand the three-sector-model, but by an ‘information sector’ in which he intends to summarise activities that produce equipment for information as well as services dealing with information. As it turns out, this attempt met data problems and did not manage to replace the high-level three sector model (Illeris 2007: 20-22).

Another approach aims to distinguish a separate sector that comprises of creative activities such as writing and publishing, composing music, creating works of art and devising computer programs. Such activities and their consumption by consumers have the character of services, but their distribution operates via embodiment in medias such as books, newspapers and records, which have the characteristics of goods. This approach turns out to be equally unconsidered amongst economist and scholars (Illeris 2007: 20-22).

To summarise the model of structuring the economy into primary, secondary and tertiary activities remains the widely used and accepted division of economic activities. It is the basis of statistical data all over the world, despite the sound arguments and weaknesses there undoubtably are regarding the blurred borderlines between goods and services (Illeris 2007: 20-22).

Nevertheless, the traditional subdivision of economic activities into three three high-level sectors has in fact been refined over time by introducing additional lower hierarchical levels. In the past, international organisations and individual countries have independently from each other developed individually modified classifications tailored to best suit their circumstances. Inevitably, this resulted in difficulties regarding the international comparability of statistical data due to dissent standards (Statistisches Bundesamt 2008: 7-9, & Statistisches Bundesamt 2009: 6). However, the increasing international interweavement of economies has created the need for comparable economic statistics. Consequently, a system of economic classification was developed in the late 1980s and early 1990s under the patronage of the United Nations that addresses the need for harmonisation among statistical standards. In this context, national points of view had to retire behind the interest of better comparability. As a result, existing deviations in the way that countries collect and analyse their economic data are increasingly abolished, enabling accurate comparability (Statistisches Bundesamt 2008: 7-9, & Statistisches Bundesamt 2009: 6).

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5. Services in Statistics

Triggered by the outlined effects of progressing technology, increasing labor

productivity, deregulation and liberalisation of trade and advancing globalisation in

effect, the structures within economies worldwide have changed and continue to

change further.

While half a century ago the industrial sector was dominant in terms of employment

and gross value added, the service sector nowadays makes up for the the largest

contribution to gross domestic product and accounts for the highest employment share

in most developed countries.

The increased relevance of the service sector is reflected in official statistics

(Statistisches Bundesamt 2009: 6).

5.1 Service Statistics for Germany

Over the last decades profound structural changes in the German economy have been

recorded.

The tertiary sector has consistently grown in importance, while agriculture, forestry and

fishing (primary sector) as well as the manufacturing sector (secondary sector) have

lost in significance.

The structural changes are reflected in the share of labour force employed in the

service sector as well as the percentage contribution to gross domestic product (GDP)

by the service sector (Statistisches Bundesamt 2009: 6-9).

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5.1.1 Share of Labour Force by Sectors

Figure 3 : Development of Labour Force Share by Sectors in Germany (1950-2010)Source: Own illustration following Statistisches Bundesamt 2010

Figure 3 visualises the developments regarding the share of labour force employed by

economic sectors in Germany between 1950 and 2010. From Figure 3, it is can be

read that the tertiary sector accounted for 32,5 % of the labour force’s employment in

1950, while the primary sector made up for 24,6 % and the secondary sector

represented for the largest share of employment in 1950 with 49,9 %.

This distribution has profoundly changed since 1950. As can be read from Figure 3, the

tertiary sector had replaced the secondary sector as the sector with the largest share of

labour force by 1972 and has since expanded its position.

In the same vein, the primary and secondary sector have continuously lost in

significance regarding their share in labour force since 1950.

To specify these developments, it can be interpreted from Figure 3 that the primary

sector decreased by 22,5 % in share of labour force between 1950 and 2010, while the

secondary sector decreased by 25,5 % during the same period.

On the contrary, the service sector’s share of employment rose by 41 % between 1950

and 2010.

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Taking a closer look at the year-on-year changes regarding the share of labour force

captured by primary, secondary and tertiary sector in Germany for the years between

1950 and 2010, it can be concluded that the primary sector’s share of labour force

decreased year-on-year by an average of -0,4 % with a standard deviation10 of 0,4 from

the mean. This quantifies that the decrease ran steady without any years in the data

set that could be classified as outliners from a statistical point of view.

The development concerning the decrease in the secondary sector’s share of labour

force ran similar in the sense that its development portrays an equally steady course in

decrease between 1950 and 2010. Year-on-year the secondary sector’s share of

employment decreased by an average of -0,3 % with a standard deviation of 0,6 from

the mean.

The tertiary sector’s share of employment, on the contrary, increased steadily for the

period between 1950 and 2010, growing by a year-on-year average of 0,7 % with a

standard deviation from the mean of 0,5 between 1950 and 2010.

5.1.2 Contribution to Gross Domestic Product

Figure 4 : Development of Service Sector’s Contribution to German GDP (1970-2009)Source: Own illustration following The World Bank 2010a

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10 Standard deviation (SD) is the average deviation of a set of data from its mean and computed as the positive square root of the variance (Anderson et al. 2010: 80).

Figure 4 shows the development of the German service sector’s contribution to gross

domestic product in Germany between 1970 and 2009.

It displays that in 1970 the tertiary sector accounted for 48,2 % of the value added and

that by 2009 this share had increased by 24,5 % representing 72,7 % of the gross

domestic product in Germany.

The development regarding the gross value added ran analogous to that concerning

the development of the share of labour force employed in services for Germany in the

sense that the service sector’s contribution to gross domestic product grew likewise

continuously. The steady growth in contribution can be quantified as an year-on-year

average of 0,6 % coupled with a standard deviation of the mean of 0,8 for each

registered year.

Furthermore, it is worth while mentioning that the gross value added in Germany 2007

was more than six times greater than in 1970 (Statistisches Bundesamt 2009: 6).

5.2 Service Statistics for Europe and the World

The economic structural changes and the shift towards services in terms of gross value

added and the employment can also be observed in other European and developed

countries.

For this purpose the following section will outline and describe the developments

regarding the service sector’s growth in terms of contribution to gross domestic product

in EU 11 - and OECD 12 countries.

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11 The European Union (EU) is economic and political union of 27 european member states that party holds sovereign and legislative power over member states’ national dealings (EUROPA - Portal of the European institutions 2011).

12 The Organisation for Economic Cooperation and Development (OECD) is an organisation of 34 international member states that promotes economic growth, coordinates economic policies, trade liberalisation, foreign trade and aids economic development amongst member states (OECD Publications 2011a & OECD Publications 2011b).

5.2.1 Service Statistics for EU Countries

This section will outline the structural changes accumulated and recorded for EU

countries in terms of the accumulated service sector’s contribution to gross domestic

product across EU countries13.

Figure 5 : Development of Service Sector’s Contribution to GDP in EU Countries

(1970-2009)Source: Own illustration following The World Bank 2010b

The service sector’s growth within the European Union becomes clear considering

Figure 5, which portrays the developments of the service sector’s contribution to gross

domestic product accumulated across EU countries.

Between 1970 and 2009 the share of the service sector's contribution in EU countries

to gross domestic product grew by 22,0 %. In 1970, the service sector’s contribution to

gross domestic product accounted for 52,7 % of gross value added, while its

contribution reached 74,7 % in 2009.

The service sector’s growth in terms of share of the service sector's contribution to

gross domestic product can be quantified as an average year-on-year increase of 0,6

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13 Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece. Hungary, Ireland, Italy, Latvia Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom (EUROPA - Portal of the European institutions 2011).

% with a standard deviation of 0,5, which expresses a steady growth with no years that

can be identified as outliners from a statistical perspective.

5.2.2 Service Statistics for OECD Countries

This section will outline the structural changes recorded for OECD member states14 in

terms of the accumulated service sector’s contribution to gross domestic product

across OECD member states.

Figure 6 : Development of Service Sector’s Contribution to GDP in OECD Countries

(1970-2008)Source: Own illustration following The World Bank 2010b

Likewise, the service sector’s growth appears in the development of the service

sector’s contribution to gross domestic product in OECD countries.

In 1970, the service sector in OECD countries made up for 55,3% of the value added,

while by 2008 this figure had increased by 18,0 % to 73,3 % in total.

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14 Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States (OECD Publications 2011a).

As Figure 6 indicates, the increase in the service sector’s contribution to gross

domestic product ran consistently with no statistical outliners. This is validated when

considering its year-on-year average growth of 0,5% in combination with a standard

deviation of 0,5 from the mean.

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6. Services

Services and goods are both considered to be products. However, there are differences that distinguish goods from services (Nickels et al. 2008: G-17).

In this context, De Pelsmacker & Van den Bergh (1998:79) suggest that services are unique from goods in their management and marketing approach by arguing that “a number of distinct characteristics of services [...] determine the rules about their management, communication and promotion”.

6.1 Defining Services

According to Teboul (2006: 4) who refers to an issue of The Economist from 1985 services can be defined as intangible products that can be “sold in trade, but cannot be dropped on your feet”.

This deliberately awkwardly formulated definition by Teboul demonstrates that scholars in general have found it extremely difficult to construct a rigorous definition of services. Correspondingly, Lewis et al. (1999: 6) argue that “services have traditionally been difficult to define”. In the same vein, Graf (2005: 42) mentions that “there has been a debate on service definitions over decades amongst academics”.

Originally, the category of services was a residual that embraced everything that was not included in the primary and secondary sectors of economies. This has encouraged attempts to redefine services through identification of their unique characteristics and features in order to delimit services from primary and secondary economic activities. These definition attempts are mainly driven by the increasing significance of services globally which in effect lead to growing discontent towards defining services with a negative connotation as residual. To underpin this endeavour, it should be recapitulated from Part One of this paper that the tertiary sector nowadays accounts for the most significant of the three high-level sectors in developed countries in terms of contribution to gross domestic product as well as in share of labour force (Illeris 2007: 19-25). In 1960, the American Management Association defined services as “activities, benefits, or satisfactions which are offered for sale, or are provided in connection with the sale of goods. (Cook et al. 1999: 319).

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Quinn et al. (1990: 60) present a more analytical definition that suggests services to stand for “economic activities whose output is not a physical product or construction, [but a product that] is generally consumed at the time it is produced, and provides added value in forms that are essentially intangible.”

Other authors define services as “processes involving customer contact” (Chase 1978: 137-142). Berry (1980: 25) defines services as “a deed, a performance, an effort” in contrast to goods, which he defines as “an object, a device, a thing”. Mersha (1991: 391) summarises services as “a bundle of tangible goods and intangible benefits provided in a particular environment” and Nie and Kellogg (1999: 339) conclude that “products are possessed and services are rendered, participated in, and experienced.”

Hill delivers a definition of services that aims to recognise the activities that services create. He states “a service may be defined as a change in the condition of a person or a good belonging to some economic unit, which is brought about as the result of the activity of some other economic unit, with the prior agreement of the former person or economic unit” (Illeris 2007: 22-23).

However, scholars like Gadrey point out that Hill’s definition of services is restricted to the relation of the service producer and the service user leaving out services with little or no relation between the producer its user. Furthermore, Gadrey states that Hill’s definition of services only relates to the process of a service, neglecting the output of a service (Illeris 2007: 23-24).

In reaction to his criticism, Gadrey goes on to suggest an alternative definition of services. He claims that it is applicable to speak of a service “when an organisation A which own or controls a technical or human capacity sells to an economic agent B the right to use that capacity for a certain time period in order to produce useful effects on an agent C or on goods that he owns or for which he is responsible” (Illeris 2007: 23-24).

By means of clarity, Graf (2005: 42) argues that service definition attempts can be classified into three groups on the basis of the definition’s methodology. He states that there are so called ‘enumerative approaches’ towards defining services that aim to define services by presenting examples and illustratrations of services in a descriptive manner. Furthermore, he argues that there are ‘negative definitions’ of services that declare economic activities as services which cannot be clearly identified as primary or secondary economic activity (Graf 2005: 42-44).

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Thirdly, he makes the point that there are approaches to define service that choose to describe services on the basis of their unique characteristics, referred to as ‘constitutive features’ (Graf 2005: 45-50).

Nevertheless, the overall recognition that may be drawn from the above presented definitions and Graf’s definition subsumption are firstly that services and goods seem to differ in their nature, secondly that services rely more heavily on customer perceptions, contact and expectations than goods and thirdly that service outputs are more difficult to quantify than goods (Nankervis 2005: 8).

However, there is virtually no exclusively satisfactory definition of services that incorporates all service features without contradicting on other aspects and that withstands the pace of economic change that dictates constant refinement of the service definition to accommodate for the ongoing evolution of services (Illeris 2007: 24-25, & Nankervis 2005: 8). .With regard to the difficulty of defining services all-embracingly accurately, Bryson & Daniels suggest not to become too distracted by the search of a clearcut definition of services and instead accept the fact that there is no holistically, perfectly satisfying definition of services and acknowledge that there are borderline cases (Illeris 2007: 24-25).

6.2 Constitutive Features of Services and their Implications on Marketing

Services are undoubtably a complicated phenomenon. Unlike manufactured goods, services cannot be characterised by their amenability to measurement and quantification (Búrca, Fletcher, & Linden 2004: 290-291, Búrca et al. 2004: 290-292).

Regardless of the fact that there may be no single applicable and satisfying definition that accounts for all services, there are specific characteristics that marketing theorists such as Búrca et al. (2004: 291); Bateson & Hoffmann (2006: 28); Boone & Kurtz (2004: 319) and Bradley (2005: 179) amongst many other academics generally propose in an attempt to distinguish services from goods by their unique characteristics:

- intangibility - inseparability - heterogeneity- perishability

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6.2.1 Intangibility

Intangibility is throughout literature the most cited difference between goods and services. It refers to the distinction that services, unlike goods, do not always consist of physical attributes which can be judged by consumers by sight, taste, smell or touch prior to purchase. Desmet et al. (1998: 6) add that besides their physical intangibility services can also be “difficult for the mind to grasp” which makes them conclude that services can also be “mentally intangible”. Goods such as clothing or furniture can be readily touched or held, whereas services such as legal advice or a restaurant’s ambience cannot be touched or held neither before nor after purchase and consumption. As a result, customers essentially buy the service provider’s promise on the service’s quality and outcome. This brings about the challenge for service marketing to display and communicate services to potential customers without the customer being able to objectively judge the service before purchase. Bateson & Hoffmann (2006: 30) refer to this challenge as the task of “explaining your product’s merits to consumers”. Also, service providers are exposed to subjective or deviating opinions of their services’ outcomes which can potentially harm a service provider’s reputation.Furthermore, as a consequence of intangibility, services often lack of an entity that can be stored, transported and owned. This can mean that a service firm cannot build up or store stocks of their services “against periods of high demand” (Bateson, & Hoffmann 2006: 29). In effect, service providers are somewhat limited in the number of services they can deliver according to their resources in the time during business hours. Bateson & Hoffmann (2006: 29) present evidence that “the inability [of services] to maintain inventories translates into constant supply and demand problems” and further they argue that the inability to build up inventories “presents so many challenges to marketers that it has earned its own name - perishability”. Moreover, services are not patentable due to their intangibility. As Bateson & Hoffmann (2006: 29) summarise this entails the danger that “new or existing services may be easily copied”, which leads to the valid assumption that a service firm’s knowledge and expertise may be hard to keep exclusive. In addition, the intangibility of services confronts service providers with the challenge of pricing a service. Bateson & Hoffmann (2006: 30) reveal that a product’s price is typically “based on cost-plus pricing”, but for most services “there is no cost of goods sold” that can be clearly determined. Instead, labour costs make up for the majority of incurring costs for many services (Bateson, & Hoffmann 2006: 30).In effect, Bateson & Hoffmann (2006: 28) argue that “intangibility is the primary [constitutive feature of services] from which the other three [generally proposed] characteristics emerge” being inseparability, heterogeneity and perishability (Boone & Kurtz 2004: 318-320; Bradley 2005: 178-180; Buckley et al. 1999: 149-150; Desmet et al. 1998: 4-11; & Illeris 2007: 22-28).

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6.2.2 Inseparability

The inseparability of production and consumption of services refers to the fact that many services are at least to some extent supplied and consumed simultaneously, which leads to the understanding that the process of delivering a service is tied to the interconnection or even interaction of the service provider and its customer. The inseparable nature of services oftentimes brings about that the service provider as well as the customer must be physically present in the same location so that a service can be delivered. In contrast to goods that can be produced, sold and consumed in different locations with or without time intervals between their production and sale; services on the other hand are often sold before they are produced and consumed at the same time. This implies not only that the production and consumption of goods and services runs differently, but also that the process of production and consumption oftentimes cannot be isolated for services. Bateson & Hoffmann (2006: 32) indicate that this tendency combined with services’ intangibility results in that service providers become a “tangible cue” associated with the service. Therefore, the customer’s service assessment is partly based upon and traceable to the service provider’s “use of language, clothing, personal hygiene and interpersonal communication skills” besides the service quality itself (Bateson & Hoffmann 2006: 32). Further they state that the “interaction between service provider and customer defines a critical incident [...] which represents the greatest opportunity for both gains and losses in regard to customer satisfaction and retention”. Moreover, the inseparability of services holds that a customer is directly involved in the delivery of a service including its production and consumption, whereby the level of contact and interaction between service provider and customer can vary greatly depending on the type of service. Nevertheless, by interacting with the service provider, the customer “provides inputs into the service production process” and therefore “plays a key role in the successful competition of the service encounter”. As a result, the customer can be seen as a production resource in interaction with the firm’s personnel. It follows that one may speak of co-production in services between provider and customer (Bateson, & Hoffmann 2006: 34-36; & Illeris 2007: 22-28). In the same manner, “the presence of other customers during the service encounter is [a] defining characteristic of inseparability” of service as Bateson & Hoffmann (2006: 34-36) state. This characteristic is linked to the fact that the production and consumption of a service oftentimes run parallel and that the service process thereby becomes a “shared experience” for numerous customers.

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The implications therefrom boil down to service providers being confronted with the challenge of “managing different [customers] with different needs within a single service environment”. In addition, a challenge that service providers are faced with is to mass produced their service successfully. That said, it should be recapitulated that “an individual service provider can produce only a limited supply”. As soon as a service provider is working at the top of his capacity there is a sudden stop to the number of customers a service provider can cater to. However, there is another problem attached to the pursuit of mass production in the context of services that is linked to the customer’s involvement in the production and consumption of a service. This is that a customer is required to travel to the service provider’s location or vice versa depending on what kind of environment and/or equipment is necessary to deliver a service (Boone & Kurtz 2004: 318-320; Bradley 2005: 178-180; Buckley et al. 1999: 149-150; Desmet et al. 1998: 4-11; & Illeris 2007: 22-28).

6.2.3 Heterogeneity

In many cases the provision of services is embodied in the firm’s personnel, which makes services prone to volatility in product outcomes and quality and thereby exposes services to deviations in the consistency from one service transaction to the next. Academics refer to this as the heterogeneity of services. The marketing challenges that are revealed from services being constitutively heterogeneous translate into that services are hard to standardise and that quality controls are more difficult to conduct and evaluate than in manufacturing services. This is triggered by the fact that the delivery of a service involves both the inputs of the service provider and the customer. This cooperation influences the service’s quality, since human’s performances and behaviours are never alike nor are they retrievable in a standardised form. Bateson & Hoffmann (2006: 32) even go as far as to say that “heterogeneity, almost by definition, makes it impossible for a service operation to achieve 100 percent perfect quality on an ongoing basis”. Nevertheless, the service quality and its consistency depends heavily on the professional and social qualifications of the personnel (Boone & Kurtz 2004: 318-320; Bradley 2005: 178-180; Buckley et al. 1999: 149-150; Desmet et al. 1998: 4-11; & Illeris 2007: 22-28).

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6.2.4 Perishability

Marketers also consider services to be perishable, which refers to the tendency that services cannot be stored, inventoried or reserved. Unlike goods that can be stored and sold at a later date, services that are not sold when they become available cease to exist. This can be illustrated by thinking of unoccupied airline seats that are not sold. These not realised sales cannot be inventoried or added to the aircraft during busy holiday times when extra capacity is needed (Desmet et al. 1998: 4-11; & Illeris 2007: 22-28).Bateson & Hoffmann (2006: 44) point out that the inability of service firms to build up inventories “creates profound difficulties for marketing”. Services’ perishability that brings about the non-existence of inventories makes quality controls for service firms a lot more difficult than for manufacturing companies which can use sampling techniques to ensure minimum variability of their outputs. A manufacturing company that detects goods that does not meet the set quality level can either alter or scrap the good; service firms do not have this possibility since the production and consumption often run simultaneous, which rules out the option of retroactive intervention. Another challenge to service marketers is that the non-existence of inventories makes matching supply and demand a major obstacle (Bateson, & Hoffmann 2006: 45-46). Therefore, Bateson, & Hoffmann (2006: 45-46) point out that “the only way that supply matches demand is by accident” and that service firms can only refer to “guesstimation” of demand. It should be noted that service firms like McDonald’s Inc.15 have managed to inventory parts of their service. McDonald’s Inc. are able to inventory their hamburgers for a limited period of time before they are either sold or disposed. However, a McDonald’s outlet cannot inventory the entire service experience and for instance save spare capacity on a weekday evening to make use of it during busier weekend evenings (Bateson, & Hoffmann 2006: 41-44).

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15 Mc Donald’s Inc. operates more than 32 000 quick-service restaurants in 117 countries worldwide (McDonald’s Inc. 2011).

6.2.5 Summary

In addition, some academic also point out the issue of ownership in services to distinguish goods from services. The above given illustration involving seats in an airline also serves to describe the matter of ownership in services. With many services the customer solely acquires the right to use, to access or to hire the service. Oftentimes, a customer does not own anything after a flight in an airline or a meal in restaurant. As a result, the purchase of a service can result in the ownership of nothing tangible as opposed to the purchase of a good (Buckley et al. 1999: 149-150).

To summarise it can be pointed out that scholars agree that services by tendency are of rather intangible nature. Also, academics widely agree that services’ production and consumption often run simultaneously which means that services by tendency are rather inseparable. Besides, there is a consent among scholars that services can often not be stored or inventoried due to services’ tendencies to cease in existence, which refers to the perishability that many services hold. Finally, there is also an agreement that services tend to be heterogeneous in output and quality, while goods are said to be of more homogeneous nature (Boone, & Kurtz 2004: 318-320, Bradley 2005: 178-180, Buckley et al. 1999: 149-150, Desmet et al. 1998: 4-11, & Illeris 2007: 22-28).

These differences between good and services, namely intangibility, inseparability, heterogeneity, perishability are referred to as service constitutive characteristics. For the sake of accuracy, it is however necessary to clarify that few services in fact display all these features, although most exhibit more than one. However, it would be impossible to identify a list of characteristics applicable to all services with regard to the diverse nature of the service industry (Illeris 2007:27-28).

The overall point that this chapter is aiming to make is that intangibility, inseparability, perishability and heterogeneity as service constitutive features have implications on a firm’s marketing approach that are of vital importance to consider, since these implications can be limiting and yield a number of challenges (Bateson & Hoffmann 2006: 29).

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7. Borderline between Goods and Services

“While goods are produced, services are performed” (Desmet et al. 1998: 5).

Having characterised distinctive attributes of services such as intangibility, inseparability, heterogeneity and perishability it could be concluded that services are different from goods. In support of such a preliminary presumption, Bateson & Hoffman (2006: 5) provide an equally-preliminary and simplistic definition of goods and services by stating that “goods are objects, devices or things” and “services are deeds, efforts, or performances”.

However, it is not quite as simple as that and only few services display all the outlined features of intangibility, inseparability, heterogeneity and perishability. In actual fact, the definition of services is even further complicated by the fact that there are few pure services and few pure goods (Desmet et al. 1998: 6).

In that regard, Bateson & Hoffman (2006:5) argue that it would be very difficult to find a pure good or a pure service. According to them a pure good would imply that the benefits received by the consumer contain no elements supplied by services and vice versa a pure service would contain no element of goods. For the purpose of illustrating this matter Desmet et al. (1998: 6) refer to the service characteristic of intangibility by stating that “not all services show the same degree of intangibility” and further they state that at the same time “few services are 100 per cent intangible, just as few goods are 100 per cent tangible” (Desmet et al. 1998: 6).

Desmet et al.’s (1998: 6) chain of argumentation indicates that the borderline between goods and services is crossed by inputs required to produce a good and inputs necessary to deliver a service. Many goods ,as Desmet et al., further contribute embody services in their production and/or distribution; just as many services involve physical goods in their existence. In fact the amount of service inputs nowadays to produce goods typically represents 70-80 percent of total costs (Bateson & Hoffman 2006:5, & Desmet et al. 1998: 6).

Also, Buckley et al. (1999: 150) point out that “the distinction between goods and services cannot be viewed as a simple black and white categorisation” and Nankervis (2005:8) similarly refers to the affiliation of goods and services by arguing that “we may be moving into an era where goods and services are becoming merged”.

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7.1 Goods-Service Continuum by Shostack

The recognition and acceptance amongst economist that many services do not function without the support of goods and vice versa has led several scholars like Mersha (1991), Cook et al. (1998) and Chase (1978) to talk of a ‘goods-services continuum’. This idea is traceable to Shostack (1977) who further conceptualised thoughts originated by Rathmell (1966) into a ‘goods-services continuum’. Rather than attempting to define service and delimiting them from goods; the ‘goods-services continuum’ model suggests to perceive good and service along a continuum that positions goods and services based on their level of intangibility in their existence. Thereby the continuum maps out and illustrates the combination of tangible and intangible attributes that make up a product (Beech, & Chadwick 2007: 162; & Nankervis 2005: 6).

Figure 7 : Goods-Service Continuum (Shostack)Source: Own illustration following Nankervis 2005: 7

As can be read from the continuum, the area above the horizontal line refers to intangible components of a product and its production, while the area below the horizontal line refers to tangible components of a product and its production. The higher up a product is positioned, the higher the product’s and its production’s composure of intangible components is and vice versa this methodology applies for the lower a product is positioned. This approach can be illustrated by thinking of a meal in a restaurant, which comprises of both tangible products in terms of food, furnishing and fitting as well as intangible products such as the experience, the staffing service and the atmosphere, which Shostack weights as a “balanced entity between goods and services”.

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To be noted also is that Shostack sets ‘salt’ and ‘teaching’ as extreme endpoints of the continuum with no or very little complementary components (Nankervis 2005: 7). The ‘goods-service continuum’ by Shostack is reprinted and referred to in many publication and found favour with many academics such as Kumar who underlines the continuum’s applicability by stating that “the continuum highlights the fact that most services are in reality a combination of products and services having both tangible and intangible aspects” (Kumar 2010: 28).

Intangibility is the parameter that lays out the basis of the ‘goods-services continuum’ by Shostack. Beech & Chadwick (2007:19) state that it is valid to do so, since “the nature of services is in essence defined by the level of tangibility within its existence”. Likewise Bateson & Hoffmann (2006: 28) express their approval by arguing that “intangibility [is] the mother of all unique differences” between goods and services. Shostack constructed the ‘goods-service continuum’ to highlight that the marketing approaches applicable to services and goods differ more the greater their position on the continuum is apart. This Shostack summarises by supposing that a product with a greater degree of intangible elements will differ more from the marketing approach of a ‘pure good’ than a ‘product’ with less intangible elements. In relation to the dealings of chapter 9, Buckley & Ghauri (1999:150) argue that “it would not be false to to assume that the greater the degree of intangible elements the more likelihood there is of foreign expansion strategies to differ from those traditionally associated with product manufacturing.”

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7.2 Goods-Service Continuum by Graf

In support of the view that most products being either goods or service do not function

or exist without a degree of the other, the German scholar Graf (2005:67) developed a

similar continuum that “attempts to overcome the dichotomy of goods and services”.

However, in contrast to the ‘goods-services continuum’ by Shostack, Graf (2005: 67)

does not limited his continuum to intangibility as a parameter, but instead Graf

broadens his continuum by the service constitutive features inseparability, perishability

and heterogeneity as additional parameters (Graf 2005:67).

Figure 8 : Goods-Service Continuum (Graf)Source: Own illustration following Graf 2005: 67

Graf (2005:67) developed his version of the continuum to visualise and conceptualise

good and service as endpoints of a continuous transition that includes all service-

constitutive features in order to clarify that goods and services are not be seen as

fundamentally oppositional categories.

Graf’s (2005:66) continuum approach “to overcome the dichotomy of goods and services” displays ‘pure’ services as products for which the degree of intangibility, inseparability, perishability and heterogeneity is fully pronounced. In contrast, ‘pure’ goods are pictured as products for which the degree of intangibility, inseparability, perishability and heterogeneity is weakly or not pronounced. Graf (2005:67) summarises the continuum’s applicability by stating that “any economic activity can be positioned on such a continuum in accordance to its degree of pure good and pure service components”.

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7.3 Summary

The point that this chapter is aiming to make is to expand the previous chapter’s result that intangibility, inseparability, perishability and heterogeneity yield a number of challenges for the service’s marketing approach by the understanding that the impact of these challenges depends on the degree of service constitutive features that a service holds and that the degree of service constitutive features can be very different from service to service. (Bateson, & Hoffmann 2006: 29).

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8. Foreign Market Entry Modes

A firm’s expansion beyond its domestic market into a foreign or unattended markets for the purpose of offering and selling its goods or services can be undertaken and realised by means of a number of different and from another differing foreign market entry modes (Hübner 1996: 208).

According to Root (1982: 5-7) foreign market entry modes can be defined as “institutional arrangements that [enable] the entry of a company’s products, technology, human skills, management, or other resources into a foreign country [or unattended market]”. Nickels et al. (2008: 5) summarise the existing types of foreign market entry mode by stating that “the key strategies [to enter foreign markets] include licensing, exporting, franchising, management agreements, creating international joint ventures or strategic alliances [...] and engaging in foreign direct investments”.

Further, Root (1982: 5-7) clarifies that an entry mode consideration simply does not apply for a company that is “already located in the country that contains its market” and therefore the choice of an entry mode represents a unique challenge and contemplation within a firm’s internationalisation.

Also, Root (1982: 5-7) mentions that firms can “arrange entry into a foreign country in only two ways from an economist’s perspective” in the sense that on one hand there is the possibility of exporting a company’s “products to the target country from [its domestic] production base” into the foreign target market and on the other hand, as Root (1982: 6-7) indicates, there is the alternative possibility of transferring the firm’s “resources in technology, capital, human skills, and enterprise to a foreign country” in order to either sell its products directly to foreign customers or by means of cooperation or venture with a resident partner and that partner’s resources.

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8.1 Classification of Entry Modes

Gooderham & Nordhaug (2003: 15) explore how foreign market entry modes differ from another as to how they can be classified by revealing that marketers such as Kumar & Subramanian (1997: 53-72), Contractor & Kundu (1998: 325-358) as well as Erramilli et al. (2002: 223-242) agree that foreign entry modes, or entry strategies as they are alternatively referred to, can be classified or subdivided into equity and non-equity entry modes.

Non-Equity Modes: Equity Modes:- exporting - joint ventures- licensing - foreign direct investments- franchising- management agreements

In an article in the Journal of International Business Studies, Pan & Tse (2000: 537-539) present the Hierarchical Model of Entry Modes that visualises entry modes hierarchically in conformity with the subdivision of foreign market entry modes into equity and non-equity entry modes.

Figure 9 : Hierarchical Model of Entry ModesSource: Own illustration following Pan & Tse 2000: 538

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Figure 9 showing the Hierarchical Model of Entry Modes displays the existing entry modes that companies can potentially engage in in their pursuit of internationalisation. Further, Figure 9 classifies foreign market entry modes into Non-Equity Modes and Equity Modes on the first level of hierarchy. The second level of hierarchy identifies Exporting and Contractual Agreements as Non-Equity Modes as well as it identifies Joint Ventures (JVs) and Foreign Direct Investments (FDIs) as Equity Modes. Exporting itself is then split into Direct Exporting and Indirect Exporting, likewise Contractual Agreements are split into Licensing, Franchising and Management Agreements. Accordingly Figure 9 subdivides Joint Ventures (JVs) into Minority Joint Ventures, 50 % share Joint Ventures and Majority Joint Ventures as well as splitting Foreign Direct Investments into Greenfield and Acquisition (Pan & Tse 2000: 537-539).

8.2 Description of Entry Modes

“Entry Modes are the formats of foreign market entry” (Peng 2009: 286).

The following sections will individually outline both non-equity modes as well as equity modes and describe their distinctive features and characteristics.

8.2.1 Non-Equity Modes

Foreign market entry modes classified as non-equity modes including exporting, licensing, franchising and management agreements are characterised by the fact that that they “tend to reflect relatively smaller commitments to overseas markets” as Peng (2009: 286) summarises. The commitments associated with non-equity modes include relatively low resource commitments, control as well as low risk and profit potential (Nickels, et al. 2008:66).

8.2.1.1 Exporting

Onkvisit & Shaw (2009: 296-297) state that “exporting is a strategy in which a company [...] exports a product from its home market”, while further pointing out that oftentimes “the exported product is fundamentally the same as the one marketed in the home market”. In addition, Root (1982: 7) clarifies that for exporting “a company’s final or intermediary product [is produced] outside the target market country and subsequently transferred to it”. Gooderham & Nordhaug (2003: 15) add that exporting represents a “relatively low-risk strategy as it involves little investment and exit is [rather] unproblematic”.

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With regard to the risk exposure that a company engages in by exporting, Onkvisit & Shaw (2009: 296-297) further contribute that “risks are minimal because the company simply exports its excess production capacity when it receives orders from abroad”. Also, Onkvisit & Shaw (2009: 296-297) indicate that exporting is the most common entry mode for small firms and those that start internationalising their operations. However, problems can arise when “the country’s home-country currency is strong” as Onkvisit & Shaw (2009: 296-297) reveal. In addition, Gooderham & Nordhaug (2003: 15) add in this context that import tariffs, quotas as well as freight costs can also stem exporting. Among exporting a differentiation can be made by subdividing exporting activities into indirect and direct exporting. As Búrca et al. (2004: 236-237) point out indirect exporting “refers to the use of agencies to get the product into the foreign market” which essentially realise the products’ transport and sale. In contrast, they argue that in direct exporting a firm “either sells direct to the end user” by organising the entire transport themselves or alternatively “arranges for firms in the target market to act as agents and/or distributor for its products”.

8.2.1.2 Licensing

Onkvisit & Shaw (2009: 297-301) define licensing as “an agreement that permits a foreign company to use industrial property (i.e. patents, trademarks, and copyrights), technical know how [...] architectural and engineering designs, or any combination of these in a foreign market”. In other words, the licensor grants a licensee with the right to produce “a product for sale” for a specified period in a specified territory in return for a fee, called a royalty, or other compensation. Licensing, as Gooderham & Nordhaug (2003: 15) add, is “a particularly useful option in countries where regulations limit market entry or where tariffs and quotas make export a non-viable strategy”.

8.2.1.3 Franchising

Gooderham & Nordhaug (2003: 16) state that franchising is an entry mode very similar to licensing. However, they argue that franchising is somewhat more “comprehensive” than licensing in the sense that franchising agreements cater more to service heavy activities. They explain this by indicating that “for [a franchise] fee [...] the franchisee receives a complete package comprising of the franchisor’s trademark, products and services, and a complete set of operating principles” which as they further contribute creates “the illusion do a worldwide company”. In the same vein, Root (1982: 8) emphasises that franchising stands out from licensing by its “motivation, service and duration”. Further, Root (1982: 8) reveals that not only

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does a franchise agreement grant the franchisee with the “right to use the company’s name, trademark, and technology” but in contrast to licensing the franchisor also gives assistance [...] “in organisation, marketing and general management”. Nickels et al. (2008: 67) add that similar to the conditions of licensing, a franchisor is given the right to sell a product or service in a specified geographic area.

8.2.1.4 Management Agreement

O’Connell (1999: 200) defines management agreements by the following explanation

laid out in the Encyclopedic Dictionary of International Management:

“Many organisations do not have the desire or the experience to manage their

operations in every country. When this occurs the organisation may arrange with

another company to manage and operate its foreign subsidiary, Management

[agreements] are normally compensated by means of a fee for services or a

percentage of profits”.

Onkvisit & Shaw (2009: 301) add that management agreements represent “a sound strategy” to enter politically risk foreign markets. Also they contribute that “government pressure and restrictions” may even force a company to “relinquish control” and urge the owners and/or investors to hire such a management company to coordinate operations.

8.3 Description of Equity Modes

According to Peng (2009: 286) foreign market entry modes classified as equity modes including joint ventures and foreign direct investments are “indicative of relatively larger, harder to reverse commitments”. Similarly, commitment refers to the level of resources, control as well as risk and profit potential (Nickels, et al. 2008:66).

8.3.1 Joint Venture

To Onkvisit & Shaw (2009: 301) a joint venture is “simply a partnership at corporate

level”. In support of this view, O’Connell (1999: 203) specifies a joint venture as “an

agreement between two [or more companies] to coproduce and distribute a [good or

service]” that is usually arranged between foreign and host country companies who

share ownership, control, profits and losses.

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In addition, Búrca et al. (2004: 238-239) reveal that a joint venture is a common form of

market entry into countries that have foreign investment laws requiring “some local

equity in any investment in their country”.

Theoretically, any split of equity participation in joints ventures amongst partners is

possible and dependant on the agreement between involved joint venture parties.

In the case of a joint venture partner contributing less than the other party or parties

this is referred to as a minority joint venture, whereas the other partner or the other

partners are considered to hold a majority venture (Nippa 2004: 111).

8.3.2 Foreign Direct Investments

As to Johansson (2009: 132) a foreign direct investment is a “wholly owned subsidiary” in a foreign market that is set up or acquired, owned, operated and controlled entirely by the domestic parent company. Among foreign direct investments a distinction is made between two variation of foreign wholly owned subsidiaries. These are greenfield investments and the acquisition of an existing foreign company (Tian 2007: 89). According to Tian (2007: 89) a greenfield investment “refers to starting a new enterprise from scratch while [an] acquisition refers to purchasing an established enterprise [abroad]”. Further, O’Connell (1999: 204) points out that a foreign direct investment requires “large capital investments and commitment of time and effort”. Also, he refers to the distinction between greenfield investments and acquisition of an existing foreign company by adding that a greenfield investments usually becomes subject to a company’s pursuit of establishing a foreign wholly owned subsidiary when there is no “suitable company” to acquire.

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9. Foreign Market Entry Mode Selection

“One of the most critical issues in international market entry strategy is the selection of an appropriate entry Mode” (Painado, & Barber 2007: 159).

In his publication Internationalisierung von Dienstleistungsangeboten [The Internationalisation of Services] Hübner (1996: 208) emphasises the importance of a firm to well-consider and asses its choice of foreign entry mode by indicating that “the selected entry mode and its maintenance greatly impact on a company’s success or failure abroad”. Further, Hübner contributes that “retroactive adjustments [of entry mode] can cause substantial and irreversible damage to the firm’s reputation as well as its business success abroad”.

In this context, O’Connell (1999: 202) states that the selection of a foreign market entry mode depends on a number of factors that consist inter alia of the amount of commitment a firm is willing to invest including time as well as capital, the degree of risk a firm is willing to expose itself to, the amount of control a company wishes to maintain over its operations and the profit potential a firm is willing to achieve.

Nickels et al. (2008:66) conceptualised a continuum that takes up O’Connell’s (1999: 202) consideration in that it positions foreign market entry modes according to their associated amount of commitment required, control, risk and profit potential.

Figure 10 : Foreign Entry Mode ContinuumSource: Own illustration following Nickels, et al. 2008:66

As can be read from the illustration by Nickels et al. (2008:66) licensing by tendency represents the foreign market entry mode that requires the least commitment by the firm that chooses it to internationalise operations, while also yielding the least risk, control and profit potential.

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As to Nickels et al. (2008:66) the level of commitment, control, risk and profit potential increases from licensing to exporting, franchising, and joint ventures with foreign direct investments marking the endpoint of the continuum bearing the highest level of commitment, control, risk as well as profit potential.

9.1 Entry Mode Selection Research

“Much of the literature about entry mode choice is focused exclusively on the process followed by the manufacturing sector” (Painado & Barber 2007: 160).

Many academics such as Kim & Hwang (1992: 29-53), Madhok (1998: 259-290) and Chang & Rosenzweig (2001: 747-776) come to the same conclusion in their publications.

Despite the increased importance of the service sector and growing internationalisation of service firms over the last decades in fact “few studies have undertaken to empirically analyse the factors influencing entry mode choices for service firms” as Painado & Barber (2007: 160) reveal.

Authors like Patterson & Cicic (1995: 57-83) and Clark et al. (1996: 9-28) contribute that research conducted on the choice of entry modes for service firms is both empirically and theoretically “largely fragmented, exploratory and [...] limited in comparison with research focused on the manufacturing sector” (Painado & Barber 2007: 160).

Painado & Barber (2007: 162) further point out that the decision and research on entry mode choice for manufacturing firms has been widely dominated by two traditional theories: the transactional cost theory and the organizational capabilities perspective. In relation to both theories, Painado & Barber (2007: 163) grant that “some of the underlying principles observed in the manufacturing sector are directly applicable to the service sector but [...] others may be moderated by the specific characteristics of services”. As a result thereof, Painado & Barber (2007: 164) conclude that neither of the two theories is satisfyingly applicable or entirely meaningful for the choice of foreign entry modes of service firms.

In the same vein, Painado & Barber (2007: 159-166) summarise that service constitutive features including intangibility, inseparability, heterogeneity and perishability “increase the complexity of the [foreign entry mode ] analysis” in such a

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form that “the traditional explanations of entry mode choice in manufacturing sectors [...] need to be complemented by other moderating influences“.

In the same context, Buckley & Ghauri (1999:150) argue “it would not be false to to assume that the greater the degree of [service constitutive features in a product] the more likelihood there is of foreign expansion strategies to differ from those traditionally associated with product manufacturing.”

9.2 Entry Mode Selection for Service Firms

“Intangibility, inseparability, heterogeneity and perishability present unique challenges for going abroad” (Painado & Barber 2007: 164).

Scholars around the world largely agree with Painado & Barber’s (2007: 164) statement concerning the implications that intangibility, inseparability, heterogeneity and perishability hold for the internationalisation of services. In relation to that, Graf (2005: 51) similarly argues that the service constitutive features and more so their implication “play a determining role for the choice of entry mode in service firms”. In this context, it needs to be recapitulated that few services in fact display all the service constitutive features and more importantly there are varying degrees of service constitutive features among different types of services (Illeris 2007:27-28).

9.2.1 Conceptualisation by Vandermerwe and Chadwick

Vandermerwe & Chadwick (1989: 79) demonstrated wisdom and foresight judged by the finding of this paper’s Part One by indicating in 1989 that “service internationalisation will undoubtably be an important managerial focus in the future”. Driven by this early recognition on one hand and the fragmented research on internationalisation of service firms on the other hand, they published an article in The Service Industries Journal that lays out an approach to conceptualise the choice of entry mode for service firms.

Vandermerwe & Chadwick’s (1989: 81-83) approach to conceptualise service firms’ entry mode selection utilises a methodology that classifies services according to their degree of consumer/producer interaction and their relative involvement of goods into a six-field-matrix, on the basis of which their conceptualisation builds clusters of related services which are assigned to applicable entry modes. It should be recognised that

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the degree of consumer/producer interaction essentially represents the degree of inseparability of services and the relative involvement of goods can be referred the degree intangibility of services. Therefore, Vandermerwe & Chadwick’s (1989: 81-83) approach is based upon quantifying the degree of the service constitutive features inseparability and intangibility.

9.2.1.1 Classification by Clustering

Vandermerwe & Chadwick’s (1989: 81-83) conceptualisation classifies services on two dimensions. One dimension sectors services according to their degree of consumer/producer interaction into either ‘lower’ or ‘higher’. Whereas, the other dimension segments services based on their relative involvement of goods into either ‘pure services’ with no or low involvement of goods, ‘services with some goods’ or ‘services embodied in goods’.By means of this “two-way classification” Vandermerwe & Chadwick (1989: 81-83) come up with a “Six-Sector-Matrix” that preliminary classes services into six individual high level categories, called sectors.

Figure 11 : Six-Sector-MatrixSource: Own illustration following Vandermerwe & Chadwick 1989: 82

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9.2.1.1.1 Sector 1: Low Goods / Lower Interaction

Sector one summarises services that do not feature goods or feature goods to a minor extent and that require a minimal degree of interaction between consumer and service provider. According to Vandermerwe & Chadwick (1989: 81) “these services are limited in their international potential (Graf 2005: 93).

9.2.1.1.2 Sector 2: Medium Goods / Lower interaction

For service assigned to sector two “interaction [between consumer and service provider] is relatively low, but goods take a more significant role” in the services’ make-up. (Vandermerwe & Chadwick’s 1989: 82). Graf (2005: 93-94) argues on behalf of Vandermerwe & Chadwick (1989: 82) that “this sector has high internationalisation potential because goods that facilitate the services are easily taken to foreign markets”.

9.2.1.1.3 Sector 3: High Goods / Lower Interaction

According to Vandermerwe & Chadwick (1989: 82) “services in sector three are primarily embodied in goods with a low level of interaction [...] These services are basically exportable and can be globalised easily and quickly”

9.2.1.1.4 Sector 4: Low Goods / Higher Interaction

Services included in sector four account for traditional services “characterised by high interaction between producer and consumer during delivery and low use of goods as inputs ” (Vandermerwe & Chadwick’s 1989: 82).

9.2.1.1.5 Sector 5: Medium Goods / Higher Interaction

Services incorporated in sector five require a high degree of interaction and goods feature to a large extent. Vandermerwe & Chadwick (1989: 83) therefore conclude that“service providers and customers interact personally and the use of goods is reasonably high. Internationalisation involves both people and goods and a balance between the two”.

9.2.1.1.6 Sector 6: High Goods / Higher Interaction

On behalf of Vandermerwe & Chadwick (1989: 83), Graf (2005: 94) states that “both the use of goods and interaction are high in this sector”.

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9.2.1.2 Correlation between Clusters and Entry Modes

On the basis of classifying services by the Six-Sector-Matrix, Vandermerwe & Chadwick (1989: 83) rearrange service within each sector to express that “in reality very few services fit neatly into one sector” and thereby illustrate their individual relative degree of consumer/producer interaction as well as their individual involvement of goods (Vandermerwe & Chadwick 1989: 86).

The resulting service clusters are then matched with applicable foreign entry mode strategies. Vandermerwe & Chadwick (1989: 83) summarise that the process of clustering services according to their relative involvement of goods and their degree of consumer/producer interaction narrows down applicable foreign entry modes for a service company to choose from. Vandermerwe & Chadwick further (1989: 83) reveal that the specific foreign entry mode selection from those identified as applicable by clustering, is subject to a firm’s willingness and capability to “actively invest in the foreign country” which in return “determines the extent to which a corporation has control and permanent presence in the host country”. This is illustrated in Figure 12.

Figure 12 : Service Clusters and Applicable Entry ModesSource: Own illustration following Vandermerwe & Chadwick further 1989: 87

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10. Conclusion

Hypothesis 1: The tertiary sector has nowadays evolved to be the most significant economic sector in developed countries’ economies.

The statistical evidence presented in Part One regarding the development of the

service sector and its role in today’s developed economies in Germany, Europe and the

OECD members quantifies significant increases in the service sector’s contribution to

gross domestic product for developed countries, as well as for the labour force

employed in services in Germany.

Furthermore, the statistical evidence shows that the service sector’s impact in terms of

contribution to gross domestic product has increased in such a manner over the last

decades reaching the point that the service sector has evolved to become the

dominant sector in develop economies nowadays.

In support of these findings, Lewis et al. (1996: ix) argue that “as defined by government statistics, services account for the major share of the gross domestic product (GDP) in all member nations of the European Union, as well as being responsible for most new jobs created in recent years”. Furthermore, he adds that “even in developing economies, the contribution made by services to both GDP and employment is growing rapidly”.

The statistical data presented in Part One also quantifies and verifies what is referred

to as “a shift towards services” by scholars like Bruhn (2005: 5-10), Painado & Barber

(2007: 159-161), Graf (2005: 1-10), Lewis et al. (1996: ix), Nankervis (2005:1-2),

Teboul, J. (2006: 1-3) and Bryson & Daniels (2007: 1-16).

In this context, Teboul, J. (2006: 1) summarises that “today, more and more attention is

paid to the service sector of the economy, whose rapid growth has led it to outstrip the

two other sectors, agriculture and industry”. Likewise, Nankervis (2005:1) states that

“services can no longer be ignored [...] due to their primacy in the economies of all

developed, and most developing, countries in the world. Service have now supplanted

both the primary (agriculture, mining) and the secondary (manufacturing) economic

sectors, as a predominant tertiary sector”.

In the same vein, Pained & Barber (2007: 160) summarise the developments in the

service sector as follows “nowadays, services have become a driving force in the

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global economy, representing the most dynamic sector in international commerce”,

while Czinkota & Ilkka (2004: 467) argue in support of this by saying that “services are

the fastest-growing sector of world trade, far outpacing the growth in the trade of

goods”.

These findings and developments are in support of the three-sector-hypothesis and the

implications that its originators Fisher (1935), Clark (1940) and Fournastié (1949) draw

from it. The three-sector-hypothesis that classifies economic activities into a primary, a

secondary and a tertiary sector, argues in light of this division that economic growth

and its implied creation of wealth inevitably results in the tertiary sector gaining in

relevance in terms of valued added to gross domestic product as well as in

employment statistics. Also, Fisher (1935), Clark (1940) and Fournastié (1949) argue

that economic growth its implied creation of wealth on the contrary cause the

agricultural and industrial sector to become less and less important judged by the same

parameters (Graf 2005: 2, Pierenkemper 2009: 134, & Staroske 1995: 1-17).

All in all, considering the statistical evidence presented together with the outlined

scholar’s sentiments Hypothesis 1: The tertiary sector has nowadays evolved to

be the most significant economic sector in developed countries’ economies

can be affirmed as well as Teboul’s statement claiming that ”we are all in services now,

more or less” for Germany, the EU and OECD member states.

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Hypothesis 2: Service constitutive features and their implications call for distinct considerations in foreign market entry mode selection.

The elaborations in Part Two point out that there is virtually no one exclusively and satisfactory definition of services that incorporates all services’ characteristics and that withstands the pace of economic change. Instead, evidence was presented that suggests to accept the fact that there is no holistically, perfectly satisfying and clearcut definition of services. In addition, the goods-service continuums by Shostack and Graf point out that a distinction between goods and services cannot be viewed as a simple black and white categorisation but that products including both goods and services, are in fact comprised of a combination tangible and intangible components.

Nevertheless, it was revealed that marketing theorists such as Búrca et al., Bateson & Hoffmann, Boone & Kurtz and Bradley propose features that are said to be constitutive to services and serve to distinguish goods from services: intangibility, inseparability, heterogeneity and perishability. Further, it is worked out that not all services display all these features and more importantly it is clarified that each of the service constitutive features yields a number of challenges to the services’ marketing approach and the pursuit of internationalisation, whereby the impact of challenges is dependant on the degree of service constitutive features a service holds.

Subsequent to these results Part Two presents and classifies foreign entry mode into equity modes comprised of exporting, licensing, franchising and management agreement and non-equity modes including joint ventures, each of which are described on the basis of their individual characterises and their commitment levels as well as their exposure to control, risk and profit potential.

Regarding the choice of foreign market entry mode, it is revealed that much of the literature about entry mode choice is focused exclusively on the process followed by the manufacturing sector and that entry mode research conducted for services is largely fragmented and exploratory. Bruhn supports this by revealing that the main focus of scientific research in relation to internationalisation decisions has been on internationalising goods and has largely neglected service.

Scholars like Painado & Barber and Javalgi aid in the understanding that service constitutive features including intangibility, inseparability, heterogeneity and perishability increase the complexity of the foreign entry mode analysis in such a form that explanations based on manufacturing evidence regarding the entry mode choice

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are neither satisfyingly applicable or entirely meaningful for the choice of foreign entry mode in the context of service firms.

On account of this recognition Part Two presents an approach by Vandermerwe & Chadwick to conceptualise the choice of foreign market entry mode for services that incorporates and accounts not only for service constitutive features as influencing factors but also for their degree.

On the basis of the identification of service constitutive features and their implications in Chapter 6.2 together with the presented academics’ sentiments it can be argued that service constitutive feature in fact yields unique challenges in marketing and as well as for the choice of foreign market entry mode. Accordingly, it can be argued that Hypothesis 2: Service constitutive features and their implications call for distinct considerations in foreign market entry mode selection is to be affirmed.

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11. Appendix

Figure 3: Development of labour force share by sectors in Germany (1950-2010)

Source: Statistisches Bundesamt 2010

56

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Figure 4: Development of Service Sector’s Contribution to German GDP (1970-2009)Source: The World Bank 2010a

58

Figure 5: Development of Service Sector’s Contribution to GDP in EU countries

(1970-2009)

Source: The World Bank 2010b

59

Figure 6: Development of Service Sector’s Contribution to GDP in OECD countries

(1970-2008)

Source: The World Bank 2010b

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Affidavit

I herewith declare that the following work I have prepared is my own without the use of material other than cited.

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