Foreign Market Entry Mode Choice: Hard- And Soft Services

Anders Majkgdrd, Uppsala University, Sweden 1

D. Deo Sharma, Copenhagen Business School, Denmark2

Abstract

Research from service firms show that one group of studies suggest that entry mode
choices by manufacturing firms are generalizable to service firms. Results from another
group of studies contradict that view. In this paper we classify services in hard services
and soft services, hard services are grouped with manufacturing firms in terms of
foreign market entry mode choices. The data consists of 362 international ,^er\ ice firms
The findings shows that hard services do not significantly differ from soft services
according to foreign market entry mode choices.

Introduction

The service industry are today an important and growing sector in the global economy.
Service industries are gradually becoming acknowledged as international growth
leaders, both in their supportive role to manufacturing firms and in their own right.
However, Erramilli and Rao (1990) note that so little is known about how ser\ ice
industries enter foreign markets.

Some analysts contend that any form of export entry is impossible, because production
and consumption of services cannot be separated (Carman and Langeard 1980; Sampson
and Snape 1985; Root 1987; Gronroos 1990). This implies that service industries often
establish through foreign direct investments owing to the service dominance and the
simultaneous production and consumption (Buckley, Pass and Prescott 1992). Other
researchers suggest that the factors that influence the choice of entry modes by
manufacturing firms are generalizable to sen ices (Wemstein 19"7 "7 ; Tcrpstra and Yu
1988; Eriksson, Johanson, Majkgard and Sharma 1997).

Erramilli (1990) divided services into hard sen iees and soft .^er\ ices Hard services (lor
example insurance, software services etc.) permits separation of production and
consumption. In soft services - on the other hand (education, management consulting
etc.) it is often difficult to separate production from consumption and that is one iea.>on
for export of soft services is difficult (Carman and Langeard 1980). Consequent!), hard
services there production and consumption of a sen ice can be full\ de-coupled and M>(I
services for which production and consumption occur simultaneously differ in the
internationalization process (Majkgard and Sharma 1998). Hard sen ice industries
internationalise presumably the same way that manufacturing industries. Soft sen ice
industries differs dramatically (Erramilli 1990; Ekeledo and Sivakumar 1998). On the

1 Assistant Professor Anders Majkgard, Department of Business Studies, Box 513, S-751 20 Uppsala, Sweden, phone +46 18 471
13 55, e-mail anders.majkgard@fek,uu.se
2 Professor D. Deo Sharma, Department of Marketing, Struenseegade 7-9. 2200 Copenhagen, Denmark, phone + 45 381 521 19.
fax +45 381 538 15. e-mail deo.sharma^cbs.dk
in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15th Annual IMP Conference,
University College, Dublin 1999
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other hand, Eriksson, Johanson, Majkgard and Sharma 1997 reports similar findings for
hard- and soft services according to the cost of the internationlization process.

The classification of hard and soft services reduces the large diversity ul the ^er\ ice
sector and uncovers useful insights about foreign market entry mode ihat exieiid besonJ
the individual service industries (hkeledo and Mvakumai 199^,

The purpose of this paper is to analyze factors determinig foreign market entr\ mode
choice of service firms. Our framework can also compare the foreign market enti\ mode
choice of hard services and soft services, and highlighting the differences and
similarities between them. One contribution of our research can be to identify situations
in which generalizability from goods to services may or may not be appropriate. Our
conceptual framework are presented in Figure 1.

Product factors

Hard services Location of Entry

production Mode
Soft services Choice
Host country market
factors

Figure 1: A model of foreign market entry mode strategies for service firms
Source: Adapted from Ekeledo and Svakninur f/iMV)

Characteristics of Cervice Firms and Internationalization

Today, the literature often treats international service firms as a heterogeneous group
(Lovelock 1983; Bradley 1991). Consumer services are treated differently than
business-to-business services (Bienstock, Mentzer and Bird 1997). Several studies of
the internationalization of service firms are based on a single group of service firms,
e.g., banks and financial firms (Engwall and Wallenstal 1988; Marquardt 1994; Hellman
1996a, 1996b), advertising agencies (Weinstein 1977; Terpstra and Yu 1988), software
firms (Bell 1995; Coviello and Munro 1997), broadcasting firms (Gray 1994), retailing
(Akehurst and Alexander 1995); hotel industry (Dunning and McQueen 1982) and
technical consultancy firms (Sharma and Johanson 1987). Some exceptions exist (e.g.,
Edvardsson, Edvinsson and Nystrom 1992, 1993; Erramilli 1991; Erramilli and Rao
1990, 1993).

Gronroos (1987) and Lovelock (1 C)S4) suggest that it is not necessary to consider
various service firms as unique and separate from each other. It is more fruitful to
recognize the common features of many service firms and develop a more general
theory (Bradley 1991). This study is in the line with this thinking.

We can identify two different research fields according to the foreign market entr\ o!
service firms. Researchers belonging to the first group suggest that there are differences

in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15th Annual IMP Conference.
University College, Dublin 1999
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between Intel-nationalization of service and internationalization of goods (for example,
Carman and Langeard 1980; Root 1987; Bradley 1991). The arguments of this group are
based mainly on the following five service characteristics (Shostack 1977; Gronroos
1990; Cowell 1991; Kotler 1997):

- Intangibility: services are invisible.

- Inseparability: simultaneous production/consumption, services cannot be exported.
- Perishability: services cannot be stored and demonstrated.
- Variability: services are less standardized.
- Ownership: ownership cannot be transferred.

Shostack (1977) and Bradley (1991) argue that intangibility is the most critical product-
service distinction, from which all other differences emerge. Intangibility implies that
there is no physical product to hold internal business umU and bu-^nev- j'.irtners
together. There is greater need for internal marketing and a stable partnership relation.
The distinction between services and goods, with respect to tangibility is not absolute,
but rather a continuum. For example, salt is a tangible good and teaching an intangible
service, and in between these extremes there exists a range of different offerings
(Shostack 1977). Intangibility affects the perception of service quality. Shostack
suggests that services should be made tangible for the customer by using concrete,
physical evidence.

Inseparability relates to service being produced and consumed simultaneously, implying

that it is difficult to perform quality control in traditional ways. Inseparability implies
that physical display is impossible and that demonstration gives the service away
(Bradley 1991). The customer is often co-producer of the service, which influences his
own experience of the outcome. The customer may demand specific adaptations and
information exchange to his/her requirements (Edvardsson 1988; Halinen 1994).
Gronroos (1990) argues that services are an activity or series of activities rather than a
tangible item, and that quality control and marketing must be integrated in production
and consumption. Activities require interaction between buvers and selieiv and arc
more people-intensive than goods (Chase 1 C)7S: Cironroos WO) Root (19;V~) :IPJUC^
that, because of the inseparability feature, services can not be exported, \ormann ( i^.N-4)
suggests that few services can be exported without also exporting the full "sen ice
delivery system". Other service researchers suggest that services with a high degree of
intangibility, interaction frequency, and simultaneous production and consumption, e.g.,
hospital and management consulting, are location-bound and must be available in full
from the day of the entry to the foreign market (Vandermerwe and Chadwick 1989,
Anand and Delios 1997). Services with a relatively high degree of tangibility and a low
demand for physical interaction between producer and customer, e.g.,
software/diskettes, can be exported, or licensed.

Perishability refers to services that cannot be stored. When demand exceeds capacity,
customers are likely to be sent away disappointed, since no inventory is available for
backup. Many services are delivered in real time. Customers have to be present to
receive the service, for example, management consulting and education.

in YlcLoughlin, Damien. and C. Horan (eds.). Proceedings uj The 15"' .Annual IMP ( on/en'iicc.
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Variability refers to the service production not being exactly the same for each deliver).
depending on who provides the services and when the> are provided. In following,
services are to a large degree experience-based and dependent on individual perceptions
in time and space, and therefore difficult to evaluate before and even after consumption
(Darby and Kami 1973). Variability also means that the services are heterogeneous in
nature and are asymmetrical between buyer and seller (Nayyar 1993). The service
provider supplies different service each time, depending on the specific problem to be
solved and his/her mood. Different customers can also experience the same service
differently, e.g., ATM. This implies that provision of service guaranties is difficult. A
service blueprint, describing service activities in a flow chart, can help to standardize
service activities (Shostack 1987).

Ownership implies it is difficult to transfer the ownership of a service, e.g., management

consulting, education, etc. In some cases, the service delivery system can be transferred,
e.g., fast-food restaurants. The main problem is that patent protection is no available for
services (Bradley 1991).

Researchers of the internationalization of service firms have gone on to develop and

apply these characteristics to service firms in the international market. Bradley (1995
435) states that to investigate "how best to approach the international marketing of
services, it is necessary to return to the unique characteristics of services intangibility,
inseparability, heterogeneity, penshabilitv and ownership. It is because >er\ ices arc
performed, rather than produced, that they have several distinguishable characteristics
which present the service firm with many problems."

The second group of researchers concerned with the internationalization of service firms
state that these service characteristics are of minor importance in the internationalization
of services. Boddewyn, Halbrich and Perry (1986: 42) argue that "every one of these
criteria by itself has been found lacking in fully differentiating a "service' from a "non-
service 1 ." They also state that there is no need for a special internationalization theory
for service firms, the existing ones can be accommodated through simple modifications
(Boddewyn et al. 1986: 54). Buckley et al. (1992) argue that the differences between
services and goods should not be overemphasized. It is a question of differences in kind
and not in nature. Erramilli (1990: 61) suggests that researchers may play "an important
role by borrowing from and adapting, when necessary, the fairly substantial knowledge
base in the manufacturing sector."

Lovelock (1996) states that there is growing recognition that service characteristics are
not universally applicable to all services. He argues that in service sectors where
customer involvement is tightlv controlled there is great opportunity, lor global
standardization. Sundbo (1994) argues that the simultaneous production and
consumption characteristic can be bridged by modulization. Modulization is a
standardization of services in separate modules which can be combined by the customer.
Sampson and Snape (1985), Vandermerwe and Chadwick (1989), and Erramilli (1991)
argue that many internationally marketed services are separable, i.e., their production
and consumption can be decoupled so that services can be exported. For example,
software services and architectural services can be transferred in a document, a diskette
or other tangible medium. Today it is even possible to export software development

in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15"' Annual IMP Conference,
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services and accountancy services via links and satellites from India to U.S. These are
called "hard services". On the other hand, many services are inseparable, or "soft
services", e.g., hotels, management consultanc}- and hospitals require local proximity of
service providers and service buyers (Vandermerwe and Chadwick 1 9N9).

The Data

Since the Central Statistical Bureau in Sweden did not have adequate data on the
international operations of service firms, the selection of cases was made from trade
registers, business newspapers and industry branch registers. The largest service firms
within each service sector were chosen.

As recommended by Gummesson (1977), Erramilli (1990) and Erramilli and Rao

(1993), several service sectors were included in each group of hard- and soft services:
Hard services consists of computer software and data processing, miscellaneous services
engineering, architecture, and soft services consists of legal, advertising, accounting,
education, and management consulting.

All of the questions are of close-ended nature using a five point Likert scale, ranging
from "not at all important" to "very important". Most of the variables are measured as a
function of the perceptions of the managers. These perceptions may vary according to
variations in their past experience of international operations, level of knowledge about
a country, etc.

In all 774 Swedish service companies with international experience were identified.
They were included in the mail survey. In September 1993, the questionnaires were sent
out to the service firms. In February 1994, after follow-up letters and telephone
reminders, 409 questionnaires had been received from presidents and vice presidents
engaged in international operations. 73 questionnaires were returned as undeliverable,
and 49 firms of the original 774 had no international operations and were not preparing
any such operations either. Consequently, the effective sample is of 652 (774 - 122 =
652) service firms, with a response rate of 62.7% (409/652). In the data base, hard
services consists of 178 service firms (49.2 %) and soft services, 184 service firms
(50.8%), in total 362 firms.

47 questionnaires were later dropped from the analysis for having missing values on
specific variables in the models. The remaining 362 questionnaires supplied good
quality data with few missing values on variables used in the models. In some cases (37
firms out of 362), the service firm had planned their first foreign assignment but had not
yet entered the foreign market. These were also included in the sample.

In order to establish whether the differences between respondents and non-respondents

affected the results, a non-respondent analysis was done. The sample was split, on the
basis of the survey return date, into early and late respondents. An analysis, in \\hich
late respondents are viewed as non-respondents (Armstrong and Overton 1977). sho\\s
that non-respondents did not differ significant!) from respondents in terms of M/C and
service industry classification. The results can thus be regarded as represcniamc tor the
non-respondents as well.

in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15"' Annual IMP Conference,
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Analysis

Service firms are profit-maximizing organizations. Consequently higher foreign profits

could be a reason for going abroad. The managers were asked how important are lower
price on services for the firm's competitiveness today. Table 1 shows that firms
supplying hard services rank lower price as a important source of advantage, on the
other hand soft services perceive lower price as unimportant. We can assume that on of
the four marketing mix variables, price play different roles in hard- and soft services.

Hard services Soft ser\ ices Tola

Unimportant 1 46(33%) 7 7(55%) -123
Important 92(67%) 64(45%) 156
Total 138(100%) 141(100%) 279
Table 1
Lower Prices us ci Source oj Advantage in the International Market

The respondents were requested to specify their answers on a five point scale
Unimportant = if the response is absolutely or rather unimportant
Important = if the reason is either absolutely, very, or rather important.

As mentioned before, one group of service researcher argue that local establishment,
e.g. close proximity between the service provider and the buyer is important for service
industries. Consequently, the managers were asked how important are having
subsidiaries abroad for the firm's competitiveness today. Table 2 shows that firms
supplying hard services rank loacal presence through subsidiary as more important than
soft services. For soft services the factor is weak. This interesting finding contradict
earlier research by for example Carman and Langeard (1980) and Vandermerwe and
Chadwick(1989).

Hard services Soft services lotal

Unimportant 34(44%) 72(54%) 106
Important 44(56%) 61(46%) 105
Total 78(100%) 133(100°.) 211

Table 2
The importance of having subsidiaries abroad for the firm A competitiveness

The managers were also asked how important are cooperative agreement with a foreign
company for the firm's competitiveness today. Fable 3 shows that hard- and
services rank cooperative agreements as important.

Hard servicesSoft services Total

Unimportant 29(38%) 43(31%) 72
Important 48(62%) 95(68%) 143
Total 77(100%) 138(100%) 215
Table 3
The importance of having cooperative agreement abroad for the firm s competitiveness

in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15th Annual IMP Conference,
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The findings in table 4 and table 5 gives some interesting itku> We ^ixed the manu^ei^
to compare cooperation partners and subsidiaries in the foreign market. 1 he ^ale i> five
point (l=never, 5=always). The scale have been dicotomized in 1 agree. 2=disagree
Table 4 shows that both hard- and soft services perceive subsidiaries as a better loeal
presence than cooperation partners.

Hard services Soft services Total

Agree 16(25%) 19(15%) 35
Disagree 48(75%) 111(85%) 159
Total 64(100%) 130(100) 194

Table 4
Cooperation partners result in better local presence than subsidiaries

In line with table 4, table 5 shows that hard- and soft services perceive subsidiaries as
having a wider network of business relationships than cooperation partners.

Hard services Soft services Total

Aizree
V
7(11%) S((V'n) is
Disagree 58(89%) 122(94%) 180
Total 65(100%) 130(100°,)) 195

Table 5
Cooperation partners have a \vider net\\ ork than subsidiaries

Services are bought on the basis of trust. Trust develops in interaction between the
service provider and the client. The response in table 6 shows that demands from
established clients were a reason for going abroad. In the overall sample a majority of
the respondents indicate this reason as important.

Hard services Soft services Total

Not important 50(36%) 42(30%) 92
Important 88(64%) 97(70%) 185
Total 138(100%) 139(100%) 277

Table 6
Demand from the established clients
The major input and output in service firms are intangible assets like knowledge and
competence. The network surrounding the firm supply this knowledge. Table 7 belovs
shows that the acquisition of knowledge and competence is an important reason for
expanding abroad. There are similar pattern for hard services and tor ^olt .service^

Hard services Soft services Total

Not important £7(20%) £5(_25%) 62
Important 110(80%) 103(75%) 213
Total 137(100%) 138(100%) 275

Table 7
in McLoughlin, Damien. and C. Horan (eds.), Proceedings of The 15th Annual IMP Conference,
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 Acquisition of knowledge and competence

We can also assume that competitive factors influence service firms in their foreign
market entry decision making process. Increased competition in the domestic market in
which the service firms have been active in the past could be a reason for going abroad.
However, table 8 shows that this factor is rather weak for both hard- and soft services.
r-——————————————————————— - —

Hard ser\ ices Soft ser\ ices Total

Not important 53(71%) 109(SO%) 162
Important 22(29%) 27(20%) 49
Total 75(100%) 136(100%) 211

Table 8
Increased competition within the domestic market (domestic firms)

In table 9 we investigate the effect of increased compeition in the international market

by non-domestic firms. This factor is also rather weak. For both hard- and soft services,
this was a weak reason for going abroad.

Hard services Soft services Total

Not important 57(75% 98(72%) 155
Important 19(25%) 38(28%) 57
Total 76(100%) 135(100%) 212
Table 9
Increased competition in the international market (non-domestic jirnis)

Discussion

Earlier research argue that hard services follow different entry mode strategies than soft
services. The main argument is that hard services can be decoupled, e.g. production can
be separated from consumption.

Our preliminary study shows no significant differences between hard- and soft services.
The findings indicate that the underlying process of internationalization e.g. knowledge
development is similar for hard- and soft services, but the manifestation in different
foreign market entry mode is slightly different.

In future research, we recommend to test propositions about the dependent variable

entry mode across different conditions. Erramilli and Rao (1990) have tried to arrange
entry mode in an ordinal scale based on involvement (l=lowest, 9=highest). Later the
same researchers Erramilli and Rao (1993) categorized the same entry modes in two
groups shared control mode and full control mode but did not include export. In our
context export should be included because export can separate hard- and soft services

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