International is at Ion of Services

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The Internationalisation of ServicesAndrew

Linda-Gene

SineadFiona

Introduction

The internationalisation of services is an area largely ignored by academics. However

it can be seen that even though it is underrepresented, it is rapidly growing in

importance as an increasing number of manufacturers go global, their service

suppliers must follow (Vandermerwe & Chadwick, 1989, as cited by Winsted &

Patterson, 1998, p. 294).

1.1 Objectives

The objective of this paper is to outline and discuss the relevant issues and challenges

from a theoretical viewpoint. This paper will analyse the relevant literature proposed

by researchers. The key objective of the paper is to highlight the increasing

importance of the internationalisation of services within the global economy.

1.2 Structure

Firstly, a brief overview of the international services market is given along with the

relevant internationalisation issues. The obstacles faced by marketers in a global

market place are highlighted, and possible solutions are presented. The application of

the ERPG framework is analysed and its relevance in the international service market.

Finally, market selection and market entry modes for services are outlined and their

applicability to firm types are discussed.

1.3 Methodology

This paper concentrates on secondary sources of research regarding the

internationalisation of services. The readings chosen for this paper were sourced from

leading authors in the field, as well textbooks and electronic academic sources.

1.4 Limitations

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As previously mentioned the empirical research in the internationalisation of services

is in its infancy, hence the sourcing of secondary information was challenging.

However the research on market entry modes was quite extensive but due to paper

length restrictions, a summary of the literature was necessary.

2. The Marketing Environment in the twenty first century

Since the nineteen nineties major changes have occurred in the business world. Many

barriers to international trade have been removed, increasing competitiveness in

markets the world over. Changes include the reunification of Germany, the opening

up of Eastern Europe, the single market of the European Union and the globalisation

of many industries (McGee & Segal-Horn, 1990). Environmental changes have

resulted in the development of new goals and strategies by many firms, and a trend of

internalisation was born.

2.1 International Marketing

International business involves the expansion of firms beyond domestic boundaries

(Simmonds, 1999). International marketing is intertwined in the discipline of

International business, and there is no obvious line of demarcation between the two.

According to Bartels (1968), while international trading has existed for many

generations, it is a relatively new concept in the context of marketing. Cateora and

Graham (2002, p.7) define international marketing as the performance of business

activities designed to plan, price, promote and direct the flow of a companys goods

and services to consumers or users in more than one nation for a profit.

International marketing differs from marketing in a domestic market, as there is a

range of unfamiliar problems and a variety of strategies needed to cope with the levels

of uncertainty existing in foreign environments (Cateora and Graham, 2002). While

marketing concepts are universally applicable, foreign environments differ

significantly, which is a fact that cannot be ignored when developing marketing

strategies. Hence international marketing is very different to domestic marketing.

2.2 The Internationalisation trend

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The internationalisation of business operations is a trend which is increasingly evident

in many countries all over the world. The number of firms operating at a global or

regional level, rather than on a national scale is steadily growing (Douglas &

Perlmutter, 1973). Once scale economies and growth opportunities in a domestic

market are exhausted, the next logical step for firms is to expand into foreign markets

(Baker, 1985). . Douglas and Perlmutter (1973) pronounce the internationalisation of

business operations as one of the most significant trends that occurred in the world of

business. According to statistics provided by the World Trade Organisation (2000) the

value of global trade has increased over the past thirty years from $200 billion to over

$7.6 trillion. International marketing as an academic field of study is also growing.

According to Cavusgil (1998) in excess of 1000 articles are published yearly in many

academic journals around the world.

The trend toward international business is fuelled by the increasingly rapid maturation

of domestic markets, which results in firms seeking out new opportunities in foreign

markets (Thomas and Hill, 1999). Modern communications and superior distribution

systems have also served to increase accessibility of foreign markets and accelerated

progress toward internationalisation. Thus, internationalisation is logical for many

firms.

2.3 Opportunities presented by Internationalisation

There is a realisation among many firms that in order to compete with multinationals,

a commitment to entering foreign markets and developing alternative ways of

operating is required (Cateora and Graham, 2002). Terpstra (1985) is also firmly in

favour of internationalisation claiming that firms are progressively more obliged to

internationalise in order to survive.

International markets provide businesses with opportunities to increase share of sales,

profits and future growth ( Furuhashi and Evarts, 1967). Firms may benefit hugely

from global market expansion as many more markets and customers become available

to them. Firms may also become more secure, as they do not depend on one market

exclusively for profit (Czinkota and Ronakainen, 2003). Consumers also benefit from

increasing international trade in terms of service or product choice, availability and

price.

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2.4 Strategic issues of Internationalisation

The trend of internationalisation presents marketing managers with a new set of

strategic issues and unique problems, when doing business across borders. Many

firms experience difficulty in attracting and maintaining custom in the intense

competitive environments of foreign markets (Thomas and Hill, 1999). New

considerations must be taken into account, which involves a change in organisational

strategies and planning processes (Douglas and Perlmutter, 1973).

More sophisticated management approaches are called for as there are many

differences between marketing in the home market and marketing abroad.

International Marketing managers are confronted with several important and complex

decisions, such as market selection and service range and scope decisions for the

overseas market. Marketing managers must also develop specific skills relating to

international business, including technical, managerial, developmental and diplomatic

( Furuhashi and Evarts, 1967).

2.5 The International Environment

International marketing is similar to domestic marketing in the fact that marketers

must alter controllable factors of product, price, promotion and place according to

corporate objectives, market conditions and consumer tastes (Cateora and Graham,

2002). The complexity of international marketing lies in the fact that marketers must

deal with two levels of uncontrollable uncertainty.

Uncontrollable factors in the domestic environment include political and legal forces,

competitive structure and economic climates. Uncontrollable factors in the foreign

environment include economic forces, political and legal forces, competitive forces,

level of technology, distribution structure, geography and infrastructure, and cultural

forces (Cateora and Graham, 2002).

The more countries in which the firm operates in, the greater the range of problems

encountered. Solutions and policies are not automatically transferable between

countries, as the equation of uncontrollable factors is different in the case of each

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country. When making business decisions each market must be looked at separately,

and it is essential for marketers to carefully analyse the uncontrollable political, legal,

economic and cultural factors.

2.6 The ERPG framework

There are four perspectives to international marketing; ethnocentric, polycentric,

regional and geocentric. The ERPG framework affects decision making throughout

the entire internationalisation process (Daly, 23rd March 2004). An ethnocentric

orientation is generally considered to be detrimental, whereby reality is perceived

only from ones own point of view, and one judges other groups based on ones own

perception of reality (Thomas & Hill, 1999). Thus, ethnocentric marketers will

undoubtedly wrongly interpret meanings about foreign cultures.

The opposite of an ethnocentric orientation is a polycentric orientation. Polycentrism

involves the assumption that each country is unique. Thus entirely unique marketing

strategies are required for each new market a firm enters (Keegan and Schlegelmilch,

2001). Managers with a regiocentric perspective consider different regions within

countries to be unique, and hence develop an integrated regional strategy (Keegan and

Schlegelmilch, 2001). Geocentrism is a fusion of the ethnocentric and the polycentric

perspectives, where the whole world is viewed as a potential market. Marketers strive

to develop integrated world market strategies, which are global yet respond to local

needs and wants (Keegan and Schlegelmilch, 2001).

3. Environmental Analysis

In the last century, the world has experienced change at an ever-quickening pace. In

particular, remarkable political, economic, social and technological change has

occurred that has dramatically altered the landscape of global business. The size and

importance of the services (tertiary) sector have grown beyond all expectations.

Services now accounts for much greater volumes of economic activity than either

secondary or primary industries in the developed world. One common trend around

the world is the increasing levels of international trade. At current growth rates, trade

between nations will exceed total commerce within nations by 2015, (Gregerson,

Morrison, Black, 1998). The companies that will succeed in the 21st

century will be

those who are sensitive to constant environmental change and who are capable of

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adapting to best embrace change (Cateora, Graham, 2002). A PEST analysis is a

useful tool for developing an understanding of the current environmental situation and

future probable trends.

3.1 Pest Analysis

3.1.1 Political/Legal

The European business landscape has changed considerably since the formation of the

European Union. Political agreements such as the Single European Market (SEM),

and more recently through the European Monetary Union (EMU), which brought

about the introduction of a common European currency, have had dramatic effects on

international business.

Shortly after the Second World War, 23 countries, including the United States, signed

the General Agreement on Tariffs and Trade (GATT). The agreement provided a

process to reduce tariffs and created an agency to serve as a watchdog over world

trade (Cateora, Graham, 2002). A forum for negotiating trade and related issues was

available to member nations. If bilateral trade disputes could not be resolved, special

GATT panels are set up to recommend action.

The WTO is an institution, not an agreement as was GATT. Rules governing trade

between its 132 members are set out by the WTO and it provides a panel of experts to

hear and rule on trade disputes between members. These rulings, unlike those within

GATT, are legally binding.

The importance of services was first recognised during the World Trade

Organisations Uruguay Round whose results came into effect in January 1995. The

US was the main mover on this; they wanted to bring services trade under the same

rules and governing body as merchandise trade. About 88 of the 117 nations agreed

reluctantly of the General Agreement on Trade in Services (GATS) to liberalize trade

in a wide range of services. GATTS is the first multi-lateral, legally enforceable

agreement covering trade and investment in the service sector. Services with special

provisions were air transport, labour movement, financial services and the

telecommunications sector.

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GATS distinguishes between four modes of supplying services: cross border trade,

consumption abroad, commercial presence, and presence of natural persons.

GATS established a set of rules and regulations governing the use by WTO member

countries of trade measures in services. These measures include laws, regulations,

administrative actions and decisions affecting purchases, payment or use of a service

or the presence of Foreign Service suppliers.

The two structural features of GATS are the set of general obligations. The first and

foremost is the principle of most favoured nation (MFN) treatment. As the name

suggest it forbids any form of discrimination between services and service suppliers

originating in different countries (WTO, 1992). The basis of the MFN is that the

same conditions are applied to all services and their providers regardless of the

nationality. Transparency is a general obligation whereby members are obligated to

publish all measures of general application and establish national enquiry points to

respond to other members information requests. Another structural feature is how

GATS perceive national treatment as an important commitment. National Treatment

implies that the member concerned does not operate discriminatory measures

benefiting domestic services or service suppliers. Finally, GATS fully safeguards the

ability of governments to enact domestic regulations, legislation and other measures

to protect public interest.

The services sector is the single most important economic activity in the EU

accounting for over two thirds of GDP and employment. In July 2002 the EU

presented its requests for improved market access to WTO members. The requests

sought a reduction in restrictions and expansion of market access opportunities for the

European service industry.

3.1.2 Economic

Economic factors play a large influence on decisions regarding the internationisation

process. Every market is characterised by many economic conditions and it is vital

that these characteristics are identified and assessed before investment is committed to

that market. Once an investment has been to enter a foreign market, the primary

economic factors must continually be monitored to enable the company to respond to

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changing market conditions. One of the key issues to analyse in the market selection

process is the level of purchasing power that foreign market has. The strength of the

foreign economy and its prospects for future economic growth are crucial variables

that must be carefully considered. The implications of economic variables are many

and can vastly change the attractiveness of the market to potential exporters.

Economic statistics such as gross national product and gross domestic product are

important indicators as to the strength and performance of the economy. He labour-

force size, structure, average salaries and unemployment rates impact on the

attractiveness of a foreign market. Personal income per capita, average family income

and the distribution of wealth provide information about the purchasing power and

levels of discretionary expenditure of the country. The countries reserves of natural

resources, principle industries (by sector, that is, primary, secondary and tertiary) and

relative importance of each industry are important considerations. The industry

growth trends and ratio of private to public ownership may provide insights also.

The significance of currency values and foreign currency exchange rates cannot be

underestimated. An economic analysis before expansion to foreign markets is not

complete without an analysis of the trade statistics of that foreign market. The balance

of payments and recent trends, along with the currency rate of exchange must be

taken into account. Any economic trade restrictions such as embargoes, quotas,

import taxes, tariffs, licensing or customs duties need to be researched thoroughly.

3.1.3 Socio-Cultural

Socio-cultural factors are perhaps the most variable element of a PEST analysis. Each

national market has a distinctive collection of socio-cultural attributes that permeate

through all aspects of life and business in that country. Economic and political

agreements can be made to make international trade easier, but no agreement can be

signed on culture to make international trade easier. Trade and commerce have

become easier in Europe since 1992. But all it really boils down to is a truck driver

will have to fill out one common document to pass customs, (Richards, 2000).

Culture is defined as a learned, shared, compelling, interrelated set of symbols

whose meanings provide a set of orientations for members of a society (Kale, 1990).

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National culture encompasses the collective values, attitudes, beliefs and customs of

nations population. These socially accepted normal values and expectations may vary

hugely from one country to another. A service provider must rethink every element of

the service and how the marketing of that service is conducted with a cultural

knowledge of the country he/she is operating in. Sensitivity to cultural issues and an

awareness of social trends will prevent many potential mistakes, which could lead to

failure in that market.

Social institutions and organisations of the foreign market should be analysed. A

comprehensive socio-cultural analysis should include the population size, growth

rates, sex, geographical and age distribution, family size, gender and family roles and

migration/immigration rates. The level of education, its influence on society and

literacy rates needs to be considered. Research on the existing social classes, ethnic

diversity and subcultures should improve the chances of success for any international

marketer. The countries religious beliefs and customs need to be recognised so as to

prevent offending any of their traditions or beliefs. The diet and eating habits of

people change considerably from country to country also. Aesthetics relates to

cultures collective perceptions on beauty and taste. Social variables such as living

conditions (types of accommodation) and home ownership levels may also provide

insights as to the needs and wants of that society. One of the most obvious cultural

variables is language. This can be subdivided into verbal (spoken/written) and non-

verbal (body language and social distance/behaviours).

3.1.4Technological

The emergence of technology is eliminating the borders and distance issues that once

separated different parts of the world and organisations. The trading environment is

becoming a borderless World (Ohmae, 1989, p.152). Technology changes the

logistics of services far more significantly than for goods. In the case for goods

marketing, at some point a physical object has to travel from the maker to the

consumer but services however, do not necessarily require a physical presence

(Samiee, 1999, p.329).

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The three categories of the classification of services described by Lovelock (1983)

can be examined under the focus of technology. The categories were people

processing services; possession-processing services and information based services.

Namely the possession-processing services and the information-based services are

affected the most by technology. Possession-processing services tend to be

geographically bound. A local presence is still required when the supplier must

come to the service objects in a fixed location, such as buildings or large items of

installed equipment (Lovelock, 1999, p.282). Information based services rely on the

transmission or orchestration of data in order to create value. The advent of modern

global telecommunications, linking intelligent machines to powerful databases, makes

it increasingly easy to deliver information based services around the world

(Lovelock, 1999, p.282).

Fisk (1999) proposes the long-term challenges of technology for international service

marketers are improving services productivity, increasing service quality,

strengthening relationships with customers, offering new services and adapting to

employee and customer needs. Improving service productivity and increasing service

quality would be considered as investments in technology. Many organisations have

invested heavily in technology in order to try improving productivity.

Service quality can be divided into static and dynamic. Static quality is preserving

or maintaining a way of doing something (Fisk, 1999, p.315). Improving the

proficiency of existing systems is the aim of static quality. At the opposite end of the

spectrum is the dynamic quality, which is concerned with discovering new ways of

doing things (Fisk, 1999, p.315). Technology would be used in this instance to

create new and improved methods and systems of doing business. By using

technology it can give the organisation a competitive advantage over its nearest rivals.

Technology helps improve the service offering through the strengthening of

relationships with customers, the offering of new services and adapting to employee

and customers needs. Developing the service offering, supplying more service

delivery choices and good communication can all lead to a superior relationship with

the customer. The use of computerized communication allows the service marketer

to establish an ongoing relationship with the customer at each stage of the

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consumption process. Online databases of customers can show consumption patterns

and help track demand fluctuations (Fisk, 1999, p.315). Mechanisms are also been

put in place with the use of technology as a means of increasing the role of the

consumer if the delivery process for example, self-service ATMs.

Organisations can now offer new services on a worldwide scale with the help of

technology. Technological tools such as the Internet are making the worldwide

market accessible to organisations in what is termed a market-space. However one

must consider the limitations that still exist regarding technology. Many undeveloped

and developing countries have extremely limited access to technologies. They often

have particularly low levels of technological literacy (skills, abilities and knowledge)

and may be very slow to adapt to technological change. Slow diffusion rates allied

with poor technological infrastructure (such as mobile phone masts, broadcasting

stations, telecommunication lines etc) can pose many challenges to service operating

relying on technology to export their service

4. Market Selection

Firms that decide to internationalise their operations screen potential target markets

on criteria such as size, growth rate, fit between customer preferences, existing

product line and competitive rivalry (Johansson 1997). Unlike manufacturing firms,

service firms do not have the choice of entering the market in various stages and may

have to do so all at once, therefore it is necessary to carefully analyse the choice of

markets in which to pursue (Gronroos 1999). Barriers to the international marketing

of services are largely related to the cultural relationships between the society and the

services offered (Dahringer 1991).

The inclusion of both tariff and non-tariff barriers influence the market selection

choice as does the level of physical and psychological closeness to the international

market (Hollensen 1998). European firms may easily consider exporting to their

neighbouring countries due to the relative proximity of these markets. Incentives and

assistance offered by foreign governments, such as tax benefits or favourable trade

policies all positively impact the choice of market selection (Hollensen 1998).

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A firm must consider which markets best fulfil their objectives so they undertake

international market research, to analyse market compatibility. Analysising numerous

markets involve large time and resource costs due to the scale of individual markets

(Terpstra and Sarathy 1997) Problems can also occur with primary and secondary

data, as it may not be as reliable as in the home market and can vary due to language,

education and cultural influences. Dissimilar forms of measurement and

documentation are employed in different countries causing gaps, which may appear in

the data. Poor infrastructure such as inferior communication and transport

infrastructure can hinder the implementation of research.

4.1 Market evaluation processJohansson (1997) divides the market evaluation process into four categories.

(1) Country identification: a firm may decide to enter a particular trade area, such

as Europe or Asia, and then the candidate countries are identified and listed.

The choice of selection is principally influenced by data such as population,

GNP, growth rates, and media reports on political and economic

developments.

(2) Preliminary screening: the identified countries are rated on macrolevel

indicators, which consist of economic development, political stability,

geographic distance, and delivery infrastructure. The objective is to shorten

the list of candidate countries and anticipate the costs of entering the market.

(3) In-depth screening: this process of in-dept screening is expensive and time

consuming and limited to countries that show apparent potential. In-depth

screening involves assessing market size and potential, the rate of market

growth, the strengths and weakness of potential competition, and the height of

entry barriers, and segmentation.

(4) Final selection: forecasted revenues and costs are compared to find the market

which best leverages the resources available. The objectives formulated by the

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firm can be weighted and the final selection can be ranked according to certain

criteria.

Johansson (1997) believes the final decision regarding market selection should not be

made until management undertake personal visits to the target country to get hands on

feeling of the market. Papadopoulos & Denis (1988) classify qualitative models as

decision-making frameworks and quantitative models into market estimation models

and market groupings.

4.2 Influential Factors

Firms face many constraints when entering the foreign market, which include

language barriers, rules and regulations, climate and economic conditions, race,

topography and political stability (Van Mesdag 2001). Thus, firms must pay careful

attention to the culture in which it will operate. Van Mesdag (2001) believes the most

difficult constraint to overcome and measure is cultural differences rooted in

history, education, economics, and legal systems. (Van Mesdag 2001, pp. 71.).

The language of a country is the most distinctive aspect of a nations culture and links

all the other elements of the cultural environment together (Terpstra & Sarathy, 1997).

Swift (2001) emphasises the importance of foreign language knowledge when

entering an international market, especially in high context cultures where

negotiations are lengthy and contact between buyer and seller is extensive.

Religion in a candidate country will also influence the selection process as it

influences the choices and way of life within a culture (Chee & Harris, 1998). What

may be acceptable practice in one country may be regarded as distasteful orinappropriate in another and can lead to failure or rejection in the international

market. (Cateora & Ghauri 1999).

The values and attitudes of the international market which are deeply rooted within a

country and will influence the person in how they think and behave (Mulbacher et al,.

(1999). The laws and politics in a society define the rules and regulations that are

followed by businesses and customers alike. It is imperative for any business that is

considering candidate countries to carry consider the political environment as it may

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adversely impact on the companys ability to operate and will determine the long term

viability of the company (Keegan 2003). Education and technology will also influence

the market choice, as education and technical know-how are imperative to create

economies of scale and increase efficiency (Mulbacher 1999).

Managing demand, price and distribution in the international market is paramount to

the success of the organisation as many services are perishable and cannot be stored

(Gronroos 1999). Organisations that decide to pursue a global marketing strategy

must choose the type of presence they want to maintain in the markets in which they

compete. This market selection decision tends to be of medium to long-term

importance and is difficult to change without the loss of time and money (Jeannet &

Hennessey 2001). Market and customer potential, country attractiveness and risk

factors all influence the choice of market (Javalgi et al,. 2002).

Most service firms require some degree of direct involvement resulting in a narrow

choice of options when internationalising (Clark & Rafaratnam 1999). It is possible to

export services that are separable, where production and consumption occur

independently whereas inseparable services cannot be exported (Erramilli & Rao

1993).

4.3 Conclusion

Erramilli (1991) concludes less experienced service firms prefer entering markets that

are similar to their home country, but as their experience increases they may seek out

new markets that are culturally and geographically distant. An inappropriate market

selection can result in financial losses for the firm, including exit from the market and

can also block opportunities and limit the range of strategic options open to the firm.

On the other hand an appropriate choice of market will affect the performance and

longevity of a foreign operation, in addition to determining the amount of resources

the firm will commit to the foreign market (Ekeledo & Sivakumar 2003). A firm will

attempt to choose leading markets that are typically strong and free from government

regulations and clustering techniques may be employed to categorise the similarities

and differences of candidate countries (Johansson 1997). A firm must weigh up the

risk versus return from entering a particular market and weigh up the criteria.

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5. Market Entry Modes

5.1 Exporting

The modes of entry into foreign markets are likely to differ on key dimensions such

as the amount of resource commitment, the extent of risk, the potential for returns and

the degree of managerial control (Westhead, 2001, p.9).

Exporting can take two forms, indirect and direct exporting. Indirect exporting is best

suited to small firms with limited resources who have only a passing interest in

exporting, while direct exporting is a strategy used by a firm that wants to establish a

greater presence in foreign markets. The characteristics, merits and limitations of each

are outlined below.

5.1.1 Indirect Exporting

(Terpstra and Sarathy 1997) state The firm is an indirect exporter when its products

are sold in foreign markets but no special activity for this purpose is carried on

within the firm (1997, p. 514). This method of foreign market entry involves the

exporter hiring an independent organisation, which becomes, in effect, the export

department for the service organisation. Indirect exporting is often said to be like a

domestic sale (Terpstra and Sarathy 1997); (Hollensen 1998). The producer

completes a domestic sale that, in turn, results in an export sale by someone else

(Walvoord 1982). Simply put, indirect exporting involves selling to others who

export. Thus the firm is not engaging meaningfully in global marketing as the firms

products are being carried abroad by others.

This market entry mode is more likely to be exercised by a firm with limited

resources available for international expansion (Hollensen, 1998). Indirect exporting

often becomes the natural first step for newcomers to the international scene, as it

requires minimal financial and management commitment, when compared to direct

exporting. Authors differ on what they consider to be the most important methods of

indirect exporting. Doole & Lowe (2001) offer domestic purchasing, piggyback

operations, and Export Management Company (EMC) or Export Houses and trading

companies to be the main methods. After examination of the literature EMCs are

most commonly highlighted. Consequently this method of indirect exporting will now

be discussed.

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5.1.2 Export Management Company (EMC) or Export Houses

EMCs or Export houses are specialist companies established to act as the export

department for an array of companies (Hollensen, 1998; Doole & Lowe, 2001). The

EMC carries out business in the name of each firm it represents. EMCs take care of

the necessary exporting documentation. Their knowledge of local buying behaviour

and government regulations are specifically useful in hard to penetrate markets

(Hollensen, 1998). EMCs are particularly advantageous in helping small to medium

sized firms with little international market experience as they allow individual firms

to gain far wider exposure of their services in foreign markets at much lower costs

than they could achieve on their own. By carrying a large range of services, EMCs

can spread their selling and administration costs over more companies

5.1.3 Direct Exporting

According to Hollensen direct exporting occurs when a manufacturer or exporter

sells directly to an importer or buyer located in a foreign market (1998, p.225).

The difference between indirect and direct exporting is that in the latter, the

manufacturer performs the export task rather than delegating it to others. The

exporting firm handles every aspect of the exporting process from market research

and handling documentation to collections of payments.

As indirect exporters grow more confident they may venture to undertake their own

exporting operations (Hollensen 1998). These operations include building up overseas

contacts; undertaking market research, handling documentation, designing and

implementing marketing mix strategies. A company may engage in direct exporting if

they wish to establish a more permanent role in international market Hollensen (1998)

identifies the two main modes of direct exporting to be agents and distributors. These

will now be discussed.

5.1.4 Agents and Distributors

The use of agents is the most frequently used method to initially penetrate a foreign

market. An agent is an individual or a company that represents a foreign organisation

in the target market. Services are sold into the target market through this third party.

The agent is usually from the foreign market, however this is not essential. Agents

usually work on a commission basis and within a clearly defined geographical area.

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Agents usually represent a number of firms and are not exclusively promoting the

firms services.

Distributors are different from agents in that they generally purchase the exporters

products with a view to reselling them in the foreign market. The distributor is

responsible for the marketing, promotion and distribution of the firms product in the

target market. A commission is not paid to the exporter because the exporter has

already received payment for the services. As distributors are established in the

market they generally good market knowledge, contacts and an established

distribution network.

5.2 Contractual Agreements

Contractual agreements take the form of licensing and franchising. Licensing as a

form of market entry is beat suited to a firm that wishes to participate in

international marketing but do not have the resources or know-how to do so.

Franchising is a form of licensing that offers a company a chance to develop

a presence in a foreign market while retaining a significant amount of control

over their operation. Licensing and franchising will now be discussed in

greater detail below.

5.2.1 Licensing

According to Johansson (1997, p.154) licensing involves offering a foreign company

the rights to use the firms proprietary technology and other know-how, usually in

return for a fee plus a royalty on revenues. The licensor may give the licensee the

right to use the firms patent on a particular product or a process, Service know-how,

technical advice and assistance, marketing advice, or the use of a trademark or the

companys name (Hollensen 1998). The time periods for licences may vary, as noted

by (Jeannet and Hennessey 2004), depending on the level of investment required by

the licensee to enter the market. As it is usually the licensee who makes all the

necessary capital investments with regard to equipment, marketing expenditure etc.,

this party may insist on a lengthy agreement in to recover the cost of investment.

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Hollensen (1998) describes licensing as a two-way process where both parties bring

substantial benefits to the relationship.

(Hollensen 1998) outlines the various licensor-licensee arrangements. When a

licensing agreement involves a service, the licensee is usually responsible for the

production, delivery and marketing of the service in an agreed area. The licensee

bears all the risk associated with investment in the venture. Royalties or fees are the

licensors main source of income resulting for the licensing agreement and may

involve a combination of an initial lump sum paid at the start of the contract and an

on-running loyalty based on licensee sales.

5.2.2 Franchising

(Doole and Lowe 2001) state franchising is a means by which a company can market

its goods and services by granting the franchisee the legal rights to use their business

format. According to (Keegan and Schlegelmilch 2000) it differs from licensing, in

that there is an entire business concept transferred between parties and a greater

degree of control over operations is maintained.

There are two major types of franchising. Firstly there is service and trade name

franchising. This type of franchising involves a distribution system where suppliers

agree contracts with dealers to buy or sell services. The dealer uses the trade name

and trademark of the company. There is the business format package franchising.

International business format franchising is a market entry mode that involves a

relationship between the entrant (the franchisor) and a host country entity, in which

the former transfers, under contract, a business package (or format), which it has

developed and owns, to the latter Hollensen (1998, p.242).

5.3 Cooperative Agreements

Joint ventures and strategic alliances are two forms of cooperative agreements that

may be undertaken between firms to develop a presence in a foreign market. Joint

ventures are best suited to two companies with complementary products or services,

thus enabling a good strategic fit. Strategic alliances may be used by a firm that have

a desire to enter foreign markets but lack the ability or confidence to do it alone, thus

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seeking the assistance of a player in the foreign market. These will now be discussed

in greater detail.

5.3.1 Joint Ventures

A joint venture is any kind of cooperative arrangement between two or more

independent companies which leads to the establishment of a third entity

organisationally separate from the parent companies.(Buchelet al., 1998, pg. 6).A joint venture with a local partner represents a more extensive form of participation

in foreign markets than either exporting or licensing. A joint venture is differentiated

from other forms of strategic alliances and collaborative agreements as the partners

create a separate legal entity. (Cateora and Graham 2002) highlight four factors

associated with joint ventures:

1. JVs are established, separate, legal entities.

2. They acknowledge intent by partners to share in management of the JV.

3. They are partnerships between legally incorporated entities such as

companies, chartered organisations, or governments, and not between

individuals.

4. Equity positions are held by each partner.

A joint venture may be the only way to enter a country or region if government

contract negotiation practices routinely favour local companies or if laws prohibit

foreign control but permit joint ventures. Besides operating to reduce political and

economic risk, joint ventures provide a less risky way to enter markets with regards to

legal and cultural issues than would be the case in an acquisition of an existing

company (Keegan and Schlegelmilch 2000). The strategic goals of a joint venture are

focused on the creation and exploitation of synergies as well as the transfer of

technologies and skills. The equity share of the international company can range

between 10% and 90% but is generally 25-75% (Terpstra and Sarathy 1997). There

are six types of joint ventures are complementary technology ventures, Market

technology joint ventures, sales joint venture, Concentration Joint venture, Research

and Development joint ventures and Supply joint ventures..

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Strategic Alliances

(Cateora and Graham 2002) define a strategic alliance as a business relationship

established by two or more companies to cooperate out of mutual need and to share

risk in achieving a common objective. Alliances differ from joint ventures because in

an alliance both firms pool their resources directly in a collaboration that goes beyond

the bounds of a joint venture (Jeannet and Hennessey 2004). The use of strategic

alliances as an international market entry mode has increased as firms increasingly

recognise the necessity to internationalise and feel the need for foreign help. (Jeannet

and Hennessey 2004) outline three different types of strategic alliances: 1)

Technology-Based Alliances 2) Production-Based Alliances 3) Distribution-Based

Alliances:

5.4 Establishing Wholly Owned Subsidiaries

Companies, wanting to enter foreign markets while retaining ultimate control and

avoiding the related costs of other entry strategies, may pursue a wholly owned

subsidiary approach. Greenfield operations is one such approach where the company

establishes a completely new operation in the foreign market, while strategic

acquirements may be used to establish a position in a foreign market by purchasing an

existing business.

5.4.1 Greenfield Operations

Greenfield investments are when a firm attempts to establish operations in a foreign

country from scratch. The main reasons for a Greenfield operation is to acquire raw

materials, to operate at lower operational costs, to avoid tariff barriers, to satisfy local

demand, or to penetrate local markets (Hollensen 1998).

5.4.2 Acquisitions

Rather than establishing a wholly owned subsidiary from scratch the company can

consider an acquisition of an existing company. Acquisitions offer swift entry into a

market and often provide access to distribution channels, an existing customer base,

and, sometimes an established brand name (Hollensen 1998). An existing company

will already have a service to be exploited, much of the distribution network and

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dealers needed, and a company can simply get on with marketing its new service

(Johansson 1997).

5.5 Electronic Entry Modes

Gronroos (1999) identified three general entry modes for service firms going into

foreign markets. One of these is particular becoming important, it is the electronic

marketing mode. Electronic marketing as an internationalising strategy means that

the service firm extends its accessibility through the use of advanced electronic

technology (Gronroos, 1999, p.295). Electronic strategies change the logistics of

services more so than for goods. The reason for this is that at some point a physical

object has to travel from the maker to the consumer but services however, do not

necessarily require a physical presence. Hence the use of technology has reduced the

need to have local physical presence in many downstream and support activities. It

allows networks to concentrate and pool knowledge and resources from separate

locations. electronic channels are the only service distributors that do not require

direct human interaction (Zeithaml & Bitner, 2003, p.396

BENEFITS: CHALLENGES:

Consistent delivery for standardised services. Customers are active, not passive.

Low cost. Lack of control of the electronic environment.

Customer convience. Price competition.

Wide distribution. Inability to customise with highly standardised

services.

Customer choice and ability to customise. Lack of consistency due to customer involvement.

Quick customer feedback. Requires changes in consumer behaviour.

Security concerns.

Competition from widening geographies.

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5.6 SUMMARY

To summarize this paper the group have devised a model outlining the advantages and

disadvantage of each foreign market entry strategy discussed. The firms most likely to

use each entry strategy are also highlighted.

Advantages Disadvantages Best Suited To

IndirectExporting

Less complexitiesthan directexporting

Less RiskInvolved

Readily AvailableExpertise

Loss of control over4Ps

Poor SupportingServices

Little Promotion

Minimal experiencegained within thefirm.

Less Profit Potential

Firms getting rid ofexcess capacity.Small firms withlimited resources.

DirectExporting

Greater ProfitPotential

Greater controlover marketingmix.

Closer tomarketplace

Closerrelationship with

buyers.

In-houseexperience and

knowledge gained

High risk

More time,personnel andcorporate resourcescommitted.

SubstantialInvestment

Distribution,administrative andmarketing costsfaced by the firm

Firms that wish toestablish a more

permanent role ininternational markets.

Licensing Inexpensive wayof achievingforeign marketentry

Licensor takesminimal risks

Limitedparticipation ininternationalmarkets.

Licensor passestechnology knowhow on to other

party.

Dependent onLicensee to exploit

products potential.

Lack of control overoperations.

Companies that wish toparticipate ininternational markets

but do not have thetime or capabilities todo so.

Franchising Quick way forcompany to enterforeign market

RelativelyInexpensive

Reasonable levelof control.

Profits dependentfor both parties on

performance offranchise

Brand image atthreat from poor

performance fromfranchisee.

Minimal skill andexperience gainedwithin the firm.

Firms with strong abrand or processes.Effective method ofinternationalisation forservices firms.

JointVentures

May be only wayof gaining access

Significant costs JV vulnerable as it is

Companies withcomplementary

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to markets

Improved accessto financialresources

Economies ofscale

Access to newtechnologies andmanagement

practices.

reliant onrelationship betweentwo parties.

Cultural differencesprominent

JV partner may

become dynamiccompetitor.

products andcapabilities.Companies with a goodfit.

StrategicAlliances

Can rapidlyexpand into newmarkets

May offerefficientmarketing and

production

Access to

additional sourcesof capital

Not a separate legalentity.

Reliant on positiverelationship between

parties involved.

Firms that recognisethe necessity tointernationalise but feelthe need for foreignhelp.

Acquisitions Swift access intomarket.

Access todistributionchannels

Existing customerbase

High control

Very high costs

Difficult to findsuitable companyfor acquisition

Compatibilityproblems withcompanies

products.

Large, heavilyresourced firms thatcan identify a suitablefirm for acquisition.

GreenfieldOperations

Access to Rawmaterials

Lowersmanufacturingcosts

Avoids tariffs

Market penetration

Total control

Have to establishoperations fromscratch

Must set updistributionchannels, sourcesuppliers &distributors etc.

Huge resourcecommitment

Large heavilyresourced firms.Firms who wish to

reduce costs,particularly labourcosts.

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