Internationalization theories

Many industries are characterised by global sourcing activities and also by networks across borders. The consequence is that innovative products can very quickly spread to new markets all over the world - because the needs and wants of buyers become more homogeneous. Hence the internationalization process of subcontractors may be quite diverse and different from the stages models. In other words, the new market conditions pull the firms into many markets very fast. Finally, financial markets have also become international, which means that an entrepreneur in any country may seek financial sources all over the world.

In the case of Born Globals we may assume that the background of the decision maker (founder) has a large influence on the internationalization path followed. Market knowledge, personal networking of the entrepreneur or international contacts and experience transmitted from former occupations, relations and education are examples of such international skills obtained prior to the birth of the firm. Factors such as education, experience from living abroad, experience of other internationally oriented jobs, etc., mould the mind of the founder and decrease the psychic distances to specific product markets significantly; the previous experience and knowledge of the founder extends the network across national borders, opening possibilities for new business ventures (Madsen and Servais, 1997).

Often Born Globals govern their sales and marketing activities through a specialised network in which they seek partners that complement their own competences; this is necessary because of their limited resources.

Most often Born Globals must choose a business area with homogeneous and minimal adaptation of the marketing mix. The argument is that these small firms cannot take a multi-domestic approach as can large firms, simply because they do not have sufficient scale in operations worldwide. They are vulnerable because they are dependent on a single product that they have to commercialise in lead markets first, no matter where such markets are situated geographically. The reason is that such markets are the key to broad and rapid market access, which is important because the fixed costs in these firms are relatively high. Since this is the key factor influencing the choice of the initial market the importance of psychic distance as market selection criteria is reduced.

Factors giving rise to the emergence of Born Globals

Several trends may explain the increasing importance of Born Globals and help explain why such companies can successfully enter international markets.

Increasing role of niche markets

There is a growing demand among customers in mature economies for specialised or customised products. With the globalization of markets and increasing worldwide competition from large multinationals, many smaller firms may have no choice but to specialise in the supplying of products that occupy a relatively narrow global niche.

Advances in process/technology production

Improvements in microprocessor-based technology imply that low-scale, batch-type production can be economical. New machine tools now permit the manufacture of complex, non-standard parts and components with relative ease. New technologies allow small companies to achieve comparable footing with large multinationals in the production of sophisticated products for sale around the world. Technology allows small importers to streamline production in ways that make their products highly competitive in the global marketplace. Furthermore, technology is facilitating the production of widely diverse products on an ever smaller scale. The consequence of this is increasing specialisation in many industries - more and more consumer goods will likely be tailor made to fit ever more diverse preferences.

Flexibility of SMEs/Born Globals

The advantages of small companies - quicker response time, flexibility, adaptability, and so on - facilitate the international endeavours of Born Globals. SMEs are more flexible and quicker to adapt to foreign tastes and international standards.

Global networks

Successful international commerce today is increasingly facilitated through partnerships with foreign businesses - distributors, trading companies, subcontractors, as well as more traditional buyers and sellers. Inexperienced managers can improve their chances for succeeding in international business if they take the time to build mutually beneficial, long-term alliances with foreign partners.

Advances and speed in information technology

A very important trend in favour of Born Globals is the recent advance in communications technology, which has accelerated the speed of information flows. Gone are the days of large, vertically integrated firms where information flows were expensive and took a considerable time to be shared. With the invention of the Internet and other telecommunication aids such as mobile phones, email and other computer-supported technologies such as electronic data interchange (EDI), managers even in small firms can efficiently manage operations across borders. Information is now readily and more quickly accessible to everyone. Everything gets smaller and faster and reaches more people and places around the globe.

Another important trend is the globalization of technology. Joint research and development platforms, international technology transfers, and the cross-border education and exchange of students in science, engineering and business have all exploded in recent years. As such, new and better approaches to manufacturing, product innovation and general operations have become much more readily available to smaller firms.

Internet-based Born Globals

The Internet revolution offers new opportunities for young SMEs to establish a global sales platform by developing e-commerce websites. Today many new and small firms are Born Globals in the way that they are 'start-ups' on the Internet and they sell to a global audience via a centralised e-commerce website. However, after some time many of these firms realise they cannot expand global sales to the next level without having some 'localised e-commerce websites'. If we compare the flow of financial results in physical ('bricks and mortar') companies with Internet-based companies we will often see a result such as that shown in Figure 7.

Figure 7. Models of economic efficiency

In the 'physical' companies we will often see the 'law of diminishing returns to scale' in function. This happens where the variable costs are relatively high compared to fixed costs of the company. We are learning that the law of diminishing returns does not always apply. In many cases the optimal production point is no longer determined by factory size, but by the point at which total market demand is satisfied. This occurs in markets in which fixed costs are much higher than variable costs. This is the case for products in digital form, where a single copy (of software, for instance) can satisfy total market needs, and for products with very high investment in intellectual content, such as pharmaceuticals.

In the successful Internet companies gains associated with increasing shares of markets do not diminish with time but actually increase. This increase creates 'increasing returns to scale'. In this environment companies must win market shares rapidly, which has driven many companies to create new strategies for market share capture. AOL Time Warner distributed CDs with software in everything from magazine inserts to fast-food giveaways, making its trial offer almost irresistible to millions of networks users.

Funding the large investments required to capture significant market share in the Internet economy does not come cheaply, especially if many companies are competing for the same market space. A substantial part of the investment must be made up front, sometimes years before revenues begin to outpace operating cost.

In a global economy companies must also be prepared, almost from the start, to serve larger market segments. Neither proposition is cheap. Amazon.com has achieved market dominance, but not without investing a half-billion dollars a year in sales and marketing.

Amazon.com is perhaps an example of Situation 2 in Figure 3.7 but, despite considerably increasing sales, it has just recently reached break-even. Many companies must also rethink their alliance strategies. No longer are alliances primarily about efficiency: 'How can I outsource certain functions to improve performance?' Now the emphasis is on gaining access to markets to exploit network effects, and on creating product and service synergies in aligning with larger, already dominant companies. For example, companies such as American Broadcasting Company (ABC) are partnering with Time Warner for access to its customer base and expected synergies with its offerings. Access has proved so valuable that companies are now paying a lot to such firms for the ability to reach its customers.

As economic fundamentals that have held true for decades begin to change, many traditional business strategies are becoming obsolete. The perfect profit formula for this new business environment is not yet clear. However, electronic commerce is changing the rules, and every business, even the most successful, needs a revised business plan.

Internationalization of services

As goods go through increasingly more complex value chains to increase firms' relative competitive advantage, services will play a more important role in their marketing. Services themselves are also getting more complex as information technology enables unlimited variations for both sales and after-sales support for target markets.

In the literature on international marketing of services an internationalization strategy is often considered more risky for service firms than for manufacturers. The main reason for this is that in many services the producer and the production facilities are part of the service, which requires that the firm has greater control of its resources than would otherwise be the case. In traditional international marketing models focusing on the needs of manufacturing firms the internationalization process can start in a minor scale using indirect export channels followed by a step-by-step move towards more direct channels. This enables the firm gradually to increase its understanding of quality expectations, personnel requirements, distribution and media structures, and buying behaviour peculiarities on the foreign market. For service firms the situation is different. They immediately face all this and other problems related to entering a foreign market. It has to find an entry mode and a strategy that helps it to cope with this situation as well as possible. The choice of course depends on the type of service and market.

First let us look at some characteristics of services.

Characteristics of services

A service is a complicated phenomenon. The word has many meanings, ranging from personal service to service as a product. Services are not things, they are processes or activities, and these activities are intangible in nature. The term can be even broader in scope. A machine, or almost any physical product, can be turned into a service to a customer if the seller makes efforts to tailor the solution to meet the most detailed demands of that customer. A machine is still a physical good, of course, but the way of treating the customer with an appropriately designed machine is a service.

Most often a service involves interactions of some sort with the service provider. However, there are situations where the customer as an individual does not interact with the service firm.

For most services, three basic characteristics can be identified.

1. Services are at least to some extent produced and consumed simultaneously.

Services are produced and consumed simultaneously (this is also called the 'inseparability' characteristic) - it is difficult to manage quality control and to do marketing in the traditional sense, since there is no preproduced quality to control before the service is sold and consumed.

One should realise that it is the visible part of the service process that matters in the customer's mind. As far as the rest is concerned, a customer can only experience the result; but the visible activities are experienced and evaluated in every detail. Quality control and marketing must therefore take place at the time and place of simultaneous service production and consumption.

Most definitions of services imply that services do not result in ownership of anything. Normally this is true. When we use the services of an airline we are entitled, for example, to be transported from one place to another, but when we arrive at our destination there is nothing left but the remaining part of the ticket and the boarding card.

Because of this it is not possible to keep services in stock in the same way as goods. If an aeroplane leaves the airport half-full the empty seats cannot be sold the next day; they are lost. Instead, capacity planning becomes a critical issue. Even though services cannot be kept in stock, one can try to keep customers in stock. For example, if a restaurant is full, it is always possible to try to keep the customer waiting in the bar until there is a free table.

2. The customer participates in the service production process, at least to some extent. The customer is not only a receiver of the service; the customer also partici-pates in the service process as a production resource in an interaction with the per-sonnel of the firm. Therefore service to one customer is not exactly the same as the'same' service to the next customer.

In many cases what the customer wants and expects is not known in detail at the beginning of the service process (service production process) or, consequently, what resources are needed, to what extent and in what configuration they should be used. A bank customer may only realise what their needs actually are during interactions with a teller or a loan officer. Thus the firm has to adjust its resources and its ways of using its resources accordingly. Customer-perceived value follows from a successful and customer-oriented management of resources relative to customer sacrifice, not from a preproduced bundle of features.

3. Services are processes consisting of activities or a series of activities rather thanthings. One important characteristic of services is their process nature. Services are processes consisting of a series of activities where a number of different types of resources - people as well as other kinds of resources - are used, often in direct interactions with the customer, so that a solution is found to a customer's problem. Because the customer participates in the process, the process, especially the part in which the customer is participating, becomes part of the solution.

In order to understand service management and the marketing of services it is critical that one realises that the consumption of a service is process consumption rather than outcome consumption. The consumer or user perceives the service process (or service production process) as part of the service consumption, not simply the outcome of that process, as in traditional marketing of physical goods. When consuming a physical product customers make use of the product itself; that is they consume the outcome of the production process. In contrast, when consuming services customers perceive the process of producing the service to a greater or smaller degree, but always to a critical extent, as well as taking part in the process.

Factors to consider in the internationalization of services Information technologies

Through information technologies service marketers can interact with customers to anticipate and serve their needs. Improving the service offering, providing alternative service delivery choices and communicating with the customer all foster better relationships with customers. The use of computerised communication allows the service marketer to establish an ongoing relationship with the customer at each stage of the consumption process. Online databases of customers can show consumption patterns and help track demand fluctuations. Automated service delivery mechanisms can provide a means for varying levels of self-service. In short, international services marketers need to examine information technologies to discover better ways to manage customer relationships.

The proliferation of information technology has made it possible for international service firms to serve customers 24 hours a day and seven days a week. Information technologies change the scale and the economics of service organizations. Home-based service organizations are now able to serve the needs of clients all over the world with a combination of computers, telephones, fax machines and electronic mail. In future it will be easy for groups of home-based service organizations to form flexible networks that quickly adapt to customer needs. However, even a firm that chooses to internationalize using electronic marketing cannot manage its service operations totally on its own. On foreign markets it has, for example, to rely on at least postal and delivery services. The possibility for the service firm to control such network partners may be very limited.

Cultural issues

Cultural issues will necessarily have a significant impact on the acceptability and adoption pattern of services. Since services inherently involve some level of human interaction the likelihood of cultural incompatibility is greater. For example, nations that culturally define the housewife's role as the family caretaker will probably not be very keen on using day-care centres.

However we design our service and whatever means of serving the market we choose there will be a need to adjust to local cultural preferences. Some means of internationalization - franchising, for example - provide an easier route to delivering culturally sensitive services by drawing on local management knowledge. Consumer services are likely to require greater cultural adaptation than do business-to-business services.

However, we cannot ignore culture and all firms providing services internationally should consider the provision of appropriate cultural training to staff, the use of local employees and, where needed, changes to the service offering itself. Without these provisions the company runs the risk of losing business to local companies or more culturally aware international service providers. Service businesses may be 'about people', but the technology and systems remain important. Even the best people struggle to deliver when systems are not in place to facilitate delivery.

Services do not necessarily require a physical presence. For established service businesses, confronting the competition from competitors trading via the Internet (or, in some industries, digital television) present a major challenge, especially for those firms that have extensive investments in property and staff around the globe.

Geographic locations

The strategic issue of location can be divided into two main aspects, that of where generally to locate a hospitality operation and then the specific issue of selecting suitable sites. In the hospitality industry the key factor in the location decision is demand. In simple terms, operations are located where demand is highest, and sited so that such demand can easily access the provision. Strategic success derives from matching the type and size of the business with the site available.

The factors that influence location in the accommodation and food service sectors are different. Hotels are primarily located near where people are travelling or at destinations that require them to stay away from home.

Standardisation versus customisation

An important strategic issue in marketing services internationally is the extent to which each service might be standardised. In addition to the necessity for customer contact for many service categories, many host government regulations in numerous services sectors make standardisation very difficult. Accounting and financial services markets are governed by very different rules around the world.

With globalization, the impact of cultural adaptation will need to be central to the study of operational topic areas such as joint venturing, materials management, purchasing, new product development, layout and process design, supervision and motivation, training, workforce scheduling, environmental management, and labour-management relations. These are all key areas of front room and back room management that are likely to require adaptation from country to country as services are globalized.

Local workers will need to be trained in their native language. The globalization of front room operations with its verbal customer contact still depends heavily on cultural adaptation of the service. The experience of The Walt Disney Company in its opening of Disneyland Paris is an example of the problems of controlling the customer contact experience in a foreign culture. Some concessions to French culture were made, such as adopting both the French and English languages for the park. However, a more troubling problem was training independently minded French nationals to act out the roles of Disney characters and perform their duties in a courteous manner. When the service is defined by the customer contact experience translating the required human behaviour of service personnel across national boundaries becomes a challenge.

Common customer needs for services vary more widely across nations than is the case for products, and addressing them requires localised solutions.

Retailing provides an excellent example of a service business that is difficult to standardise. Despite much talk about the internationalization of retail trade, local retailing regulations vary considerably, not only across countries (including within the European Union), but also within the provinces of each country.

Implications for international marketing of services

It is possible to distinguish between five main strategies for internationalizing services. These are not mutually exclusive, and in some cases some will also work well for manufactured goods (Grdnroos, 1999):

direct export;

systems export/following the large customers abroad;

direct entry/own subsidiary;

indirect entry/intermediate mode;

electronic marketing/Internet.

Direct export of services may basically take place on industrial markets. Consultants and firms repairing and maintaining valuable equipment may have their base on the domestic market and whenever needed move the resources and system required to produce the service to the client abroad. Repair services on valuable equipment are often exported in this way. Some consultants work in a similar fashion. No step-by-step learning can take place as the service has to be produced immediately. Because of this, the risk of making mistakes can be substantial.

Systems export/following the large customers abroad is a joint export by two or more firms whose solutions complement each other. A service firm may support a goods-exporting firm or another firm. For example, when a manufacturer delivers equipment or turnkey factories to international buyers a need for engineering services, distribution, cleaning, security and other services is often present. This gives service firms an opportunity to expand their markets abroad. As the literature suggests, systems export is the traditional mode for service export. For example, advertising agencies and banks have extended their accessibility abroad because of their clients' activities on international markets. In systems export the services are mainly marketed in industrial markets abroad. For example, law firms expand into multiple cities in an attempt to align themselves with their corporate accounts, service companies are pushed by their customers to operate in the same countries as their clients. The truly global company wants and demands truly global service of its travel agents, it auditors, its consultants, and others. The weakness of this strategy for a company already committed to overseas operations is that it ignores the possible vast markets where clients are not represented.

Direct entry/own subsidiary means that the service firm establishes a service-producing organization of their own on the foreign market. For manufactured goods in the first stage of a learning process a sales office can be such an organization. For a service firm, a local organization normally has to be able to produce and deliver the service from the beginning. The time for learning becomes short. Almost from day one the firm has to be able to cope with problems with production, human resource management and consumer behaviour. In addition, the local government may consider the new, international service provider a threat to local firms and even to national pride.

Indirect entry/intermediate mode is used when the service firm wants to avoid establishing a local operation that is totally or partly owned by itself but wants to establish a permanent operation in the foreign market.

Licensing agreements give a local firm exclusive rights to use the professional concept of the firm. This of course requires that exclusive rights can be guaranteed.

Franchising is a concept often used by restaurant and food service industries for indirect entry into a foreign market. Local service firms get the exclusive right to a marketing concept, which may also include rights to a certain operational mode, and in this way the concept can be replicated as much as existing demand allows throughout the foreign market. The internationalizing firm as the franchisor gets the local knowledge that the franchisees possess, whereas franchisees get an opportunity to grow with a new and perhaps well-established concept. With a reasonably standardised service offering, it would also be possible to franchise a consultancy overseas.

Another form of indirect entry is management contracts, which are often used, for example, in the hotel business. As far as the need for market knowledge is concerned, indirect entry is probably the least risky of the internationalization strategies discussed so far. Conversely, the internationalizing firm's control over the foreign operations is normally more limited when using this entry strategy (own subsidiary).

5 Electronic marketing/Internet as an internationalizing strategy means that the service firm extends its accessibility through the use of advanced electronic technology. The Internet provides firms with a way of communicating their offerings and putting them up for sale, and a way of collecting data about the buying habits and patterns of its customers and using network partners to arrange delivery and payment. The electronic bookstore Amazon.com is a good example of a firm internationalizing its services using electronic marketing. When launching the concept it had to take into account the interest in its services that would automatically develop outside national borders. TV shops (satellite television) are examples of other ways of internationalizing services using advanced technology. When using electronic marketing the firm is not bound to any particular location. The service can be administered from anywhere on the globe and still reach customers throughout a vast international market, who are connected to the Internet or exposed to satellite television broadcasting.

Summary

Born Globals represent a relatively new research field in international marketing. Born Globals share some fundamental similarities: they possess unique assets, focus on narrow global market segments, are strongly customer oriented, the entrepreneur's vision and competences are of crucial importance. In the end, for these firms, being global does not seem to be an option but a necessity. They are pushed into globalization by global customers and too small national/regional market segments. They can sustain their immediate global reach thanks to entrepreneurial vision and competences, and a deep awareness and knowledge of their competitive advantage in foreign markets.

In this chapter, the importance of the personal factors in the internationalization process of SMEs is emphasized.

For internationalization of services the following five main strategies were identified: (1) direct export; (2) systems export/following the large customers abroad; (3) direct entry/own subsidiary; (4) indirect entry/intermediate mode; (5) electronic marketing/Internet.

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