Developing Global Strategies for Service Businesses.
Author: Lovelock, Christopher H. Yip, George S.
Source: California Management Review. 38(2): 64-86. 1996 Winter.
Abstract
A study provides a framework for developing global strategies for service businesses. It integrates existing, separate frameworks on globalization and on service businesses, analyzes how the distinctive characteristics of service businesses affect globalization and which do not. It then applies the new framework to numerous industry and company examples, with particular emphasis on the role of information technology.
Full Text How do the distinctive characteristics of service businesses affect globalization and the use of global strategy? This is a crucial question for managers in numerous industries. Not only are services continuing to grow rapidly in domestic economies, but international trade in services is increasing, too. The United States, like some other developed countries, has a trade surplus in services that helps offset the deficit in merchandise trade. In contrast, Japan has been much less successful in internationalizing its service businesses.1 So it is essential to national competitiveness that governments, as well as companies, achieve a better understanding of how to develop effective global strategies for different types of service businesses. Most research to date has focused either on why and how service firms internationalize or on different modes of internationalization.2 In contrast, we examine how globalization drivers and the use of global strategy might apply to various types of services, and what differences might exist relative to manufacturing businesses. In doing so, we combine two different frameworks, one developed to analyze global strategy3 and one for service businesses.4 Overview A major theme in international business is the increasing use of global strategies. These involve the worldwide integration of strategy formulation and implementation, in contrast to a multidomestic (or multilocal) approach that provides for independent development and implementation of strategies by country or regional units.5 One key theme is that globalization potential depends on industry characteristics,6 and on specific industry globalization driversmarket, cost, government, and competitive.7 A second key theme is that the use of global strategy should differ by dimension of strategy and for different elements of the value-adding chain.8 The linkage between industry globalization drivers and global strategy-as well as the relationship of these drivers to organization structure and management processes and to consequent effects on performance-have been empirically tested for manufacturing businesses in major American and Japanese multinational corporations (MNCs).9 But research into global strategy for service businesses is still in an evolutionary stage.10 Defining Globalization The terms "global" and "globalization" are often used rather loosely. Many writers use them interchangeably with words such as international (and internationalization), transnational,11 and multinational. We believe that some clarification is in order. Strictly speaking, any service firm doing business across national frontiers can claim to be international. When passengers ride a scheduled bus line from Buffalo, New York, to Toronto, Ontario, they are using an international transportation service. A retail chain that operates in both the United Kingdom and Ireland can claim to be an international business. Moving up a notch, a bank with offices in several European countries could even claim to be multinational. None of these services, however, is global in scope. Nor, for that matter, is an insurance company doing business throughout Europe and North America. In our view, a truly global company is one that not only does business in both the eastern and western hemispheres, but also in both the northern and southern ones. In the process, geographic distances and time zone variations are maximized. With the rise of non-Japan Asia, Latin America, and Eastern Europe, operating in just the 'Triad' of North America, Western Europe and Japan is no longer sufficient. Other differences also tend to be sharpened, such as the variety of languages, currencies, cultures, legal and political systems, government policies and regulations, educational backgrounds of managers and employees, levels of national economic development, and climates. In this article, we will emphasize companies that meet our criterion of being truly global, although not all our examples will do so. Furthermore, we shall stress that simply operating globally does not mean that a company possesses a global strategy. Defining Service Businesses We will examine the ways in which global strategy for service businesses, given their distinctive characteristics, should be significantly different from manufacturing businesses. Furthermore, a fundamental premise underlying our analysis is that not all services are the same. So we will use three "lenses" with which to examine the global strategies of service-based businesses: A set of characteristics by which service-based businesses differ from goods-based businesses. A categorization of three fundamental types of service businesses. A set of eight supplementary services surrounding the core product or offering. An Overall Global Strategy Framework for Service Businesses Our overall global strategy framework is illustrated in Figure 1. In this framework, industry globalization drivers give rise to industry globalization potential, but this effect is filtered by the special characteristics of service businesses. In turn, industry globalization potential should result in four types of global strategy response: in terms of market participation, the service offering, the location and configuration of the value-adding chain, and in the nature of the marketing strategy. Here, the global strategy response is filtered by the three distinct types of service businesses. Lastly, supplementary services, which augment the core product like petals around the center of a flower, play a direct role in the make up of each aspect of global strategy. Understanding the Nature of Services "Services versus Goods Distinctions" Early research into services sought to differentiate them from goods, focusing particularly on four generic differences-intangibility, heterogeneity (variability), perishability of output, and simultaneity of production and consumption.12 Although these characteristics are still commonly cited, they have been criticized as too generic,13 and there is growing recognition that they are not universally applicable to all services. A better sense of the processes underlying service delivery is provided in an alternative set of eight characteristics.14 These characteristics begin with the nature of the output-a performance rather than an object-and also include customer involvement in production, people as part of the service experience, greater likelihood of quality control problems, harder for customers to evaluate, lack of inventories for services, greater importance of the time factor, and availability of electronic channels of distribution. Although these characteristics provide a useful starting point for thinking about the distinctive aspects of service management, not every service is equally affected by all of them. Three Categories of Services The previous list helps distinguish service-based businesses from goodsbased ones. But service businesses also differ from each other. All productsboth goods and services-consist of a core element that is surrounded by a variety of sometimes optional supplementary elements. Whether one is looking at service strategy locally or globally, it is unwise to talk in broad brush terms about the service sector or service industries as though all organizations faced more or less the same strategic problems. At the same time, it is also a mistake to fall into the trap of examining services only on an industry-by-industry basis. Probably the most useful and relevant classification concerns differences and commonalities in operational processes, since the way in which inputs are transformed into outputs has a significant effect on strategy.15 By looking at core services from an operational perspective, we can assign them to one of three broad categories, depending on the nature of the process (whether it is primarily tangible or intangible) and the extent to which customers need to be physically present during service production. People-processing services involve tangible actions to customers in person. These services require that customers themselves become part of the production process, which tends to be simultaneous with consumption. In businesses such as passenger transportation, health care, food service, and lodging services, the customer needs to enter the "service factory" (although we know it by such names as an airliner and air terminal, a hospital, a restaurant, or a hotel) and remain there during service delivery. Either customers must travel to the factory or service providers and equipment must come to the customer. In both instances, the firm needs to maintain a local geographic presence, stationing the necessary personnel, buildings, equipment, vehicles, and supplies within reach of target customers. If the customers are themselves mobile-as in the case of business travelers and tourists-then they may patronize a company's offerings in many different locations and make comparisons between them. Possession-processing services involve tangible actions to physical objects to improve their value to customers. Examples include freight transport, warehousing, equipment installation and maintenance, car repair, laundry, and disposal. The object needs to be involved in the production process, but the customer does not, since consumption of the output tends to follow production. Again, the service "factory" may be fixed or mobile. A local geographic presence is required when the supplier needs to provide service to physical objects in a specific location on a repeated basis. In the case of smaller, transportable items, the vendor can provide remote service centers for servicing-although transportation costs, customs duties, and government regulations may constrain shipment across large distances or national frontiers. Modern technology now allows a few service processes to be administered from a distance, using electronic diagnostics to pinpoint the problem. Information-based services are, perhaps, the most interesting category from the standpoint of global strategy development because they depend on collecting, manipulating, interpreting, and transmitting data to create value. Examples include accounting, banking, consulting, education, insurance, legal services, and news. Customer involvement in production of such services is often minimal. The advent of modern global telecommunications, linking intelligent machines to powerful databases, makes it possible to use electronic channels to deliver information-based services from a single "hub"to almost any location. Local presence requirements may be limited to a terminal-ranging from a telephone or fax machine to a computer or more specialized equipment like a bank ATM-connected to a reliable telecommunications infrastructure. If the latter is inadequate, then use of mobile or satellite communications may solve the problem in some instances. Service production and delivery systems can be divided into "back office" and "front office," the latter being the portion of the "service factory" encountered by customers.16 People-processing services necessarily involve a high degree of contact with service personnel and facilities; possession-processing and information-based services, by contrast, have the potential to be much lower contact in nature. Retail banking, for instance, can take place either through traditional branch banks or through such channels as mail, telephone, and Internet. The Role of Supplementary Services The core service product-a bed for the night, restoring a defective computer to good working order, or a bank account-is typically accompanied by a variety of supplementary elements. Most businesses, whether they are classified in government statistics as manufacturing or service, offer their customers a package that includes a variety of service-related activities, too. Increasingly, these supplementary elements not only add value, but also provide the differentiation that separates successful firms from the also-rans; they also offer opportunities for firms to develop effective globalization strategies. Writers and managers alike often use the terms "augmented product,"17 "extended product," or "product package" to describe the supplementary elements that add value to the core product.18 There are potentially dozens of different supplementary services, although they can be grouped into eight categories (information, consultation, order-taking, hospitality, caretaking, exceptions, billing, and payment) encircling the core product like a corona of petals: collectively, they comprise "the flower of service" (Figure 2 and Table 1).19 Many of these petals are based on informational processes that can be located in one part of the world and delivered electronically to another. Not every core product-whether a good or a service-is surrounded by supplementary elements from all eight clusters. In practice, the nature of the product, customer requirements, and competitive practices help managers to determine which supplementary service must be offered and which might usefully be added to enhance value and make it easy to do business with the organization. One determinant of what supplementary services to include is the market positioning strategy that management has selected. A strategy of adding benefits to gain a competitive edge will probably require more supplementary services (and also a higher level of performance on all such elements). In developing a global strategy, management must decide which, if any, supplementary elements should be consistent across all markets and which might be tailored to meet local needs, expectations, and competitive dynamics. This is the essence of standardization and customization, but services offer much more flexibility in this respect than do physical goods, lending themselves in many contexts to what is known as "mass customization."20 Industry Globalization Drivers What drives globalization of service businesses? Many types of drivers have been suggested for the analysis of manufacturing firms.21 We identify here the eight most relevant ones (listed in Figure 1 ) for service businesses, then systematically evaluate how the characteristics of different types of services might strengthen or weaken the effects of these drivers. We will also examine how these effects differ among the three categories of service business-peopleprocessing, possession-processing, and information-based services. Common Customer Needs Industries with customer needs and tastes that are common across countries offer more potential for globalization. Product categories such as consumer electronic devices, cigarettes, soft drinks, and computer hardware provide many instances of successful global standardization. (The simultaneous presence of successful local strategies in these categories in no way undermines the global opportunity for multinational companies. Similarly, less than total standardization, as in Coca-Cola's local adaptation of its syrup, does not void the benefits of pursuing global standardization as much possible in the appropriate industries and categories.) The service characteristic of "customer involvement in production" reduces the degree to which many services can be standardized and still meet the needs of a broad cross section of customers around the world. In general, the less the involvement, whether physical or psychological, the better the opportunity for a global approach. So we are more likely to see global standardization in fast food and airlines, where customer involvement is tightly controlled, than in medical care or education, where customer involvement is both stronger and more prolonged. Note that our observations apply to the broad "middle market" rather than to the relatively small market segment composed of affluent, highly educated, cosmopolitan customers. The service characteristic of "people as part of the service experience" also limits the potential commonality of customer needs and tastes. Differences can arise even within the same industry. In banking, the service provided by human tellers is far less standardized and standardizable than that provided by automated teller machines. Accounting services depend heavily on people. The higher status of accountants in Britain than in the United States means that British accountants provide more general business advice than do their American counterparts. And U.S.-style psychotherapy is unlikely to yield a global "McShrink" franchise. One of the greatest dilemmas in global strategy for manufacturing businesses is the need to balance global standardization with local customization. Designing, then manufacturing, a global product with a degree of local customization requires major tradeoffs. In contrast, the nature of service delivery-at the point of consumption in many cases-makes both standardization and customization equally feasible. Local elements (e.g., Balinese dancing in Indonesia) can be easily added to a global formula (Club Med vacations); using local nationals as service providers may overcome the foreignness of a standardized service (e.g., use of local cabin crews by international airlines). The practice of augmenting a core service with many supplementary elements makes it relatively easy to provide a globally standardized core service augmented (and differentiated) by nationally customized supplementary service elements. This tends to be easier than for manufacturing businesses.22 Global Customers As large corporate customers become global, they often seek to standardize and simplify the array of services they consume. For instance, firms may seek to minimize the number of auditors they use around the world, using "Big Six" accounting firms that can apply a consistent worldwide approach (within the context of national rules within each country of operation). Global management of telecommunications is provided by the "Concert" service offered by British Telecom and its American partner MCI, allowing a multinational company to outsource all responsibility for management of its purchase and use of telecommunications. Corporate banking, insurance, business logistics, and management consulting are further examples. Individuals act as global customers when they purchase goods and services on their travels. The service characteristics of "a performance rather than an object" and "greater importance of the time factor" create special opportunities for travel-related services, a very large and growing segment that starts with transportation but extends to credit, communication, and emergency support. Global customers for possession-processing services prefer common procedures and standards. For example, airlines absolutely depend on their aircraft being maintained in the same way everywhere-and, increasingly, so do customers of factory and machinery maintenance services. Global customers for people-processing services may care particularly about ubiquity, especially when traveling. The New Zealander who breaks her leg in Pamplona needs medical treatment on the spot. Global customers for information-based services may have a more diffuse set of needs, but these certainly include comprehensiveness, accuracy, and accessibility. The American executive who has lost his traveler's checks in Shanghai needs reimbursement there, now, not back home in Indiana, later. Global Channels Distributors of physical goods have globalized relatively slowly. Few distributors in any category have adequate worldwide coverage. National giants like Wal-Mart and Toys R Us from the United States, Carrefour and IKEA from Europe, and Watson's and Dairy Farm from Asia, are beginning to establish regional networks, but all are far from being able to distribute worldwide. In contrast, the "availability of electronic channels of distribution" for services provides nearly total global coverage for more and more service offerings-notably travel services, banking, customer support services, entertainment, and most forms of information products themselves. Furthermore, these electronic global channels support not just information-based services but augment people-processing (e.g., health care) and possession-processing (e.g., delivery of time-sensitive materials) services. The latest electronic channel, the World Wide Web, now offers global outreach to even the smallest of companies. The Web can help sell any type of core product through information-based supplementary services and can actually deliver many information-based services directly to customers. Global Economies of Scale Global scale economies apply when single-country markets are not large enough to allow competitors to achieve optimum scale. Scale can then be increased through participation in multiple markets, combined with product standardization and/or concentration of selected value activities. But "lack of inventories," "customer involvement in production," and "people as part of the service experience" all work against being able to concentrate production to achieve scale. So service companies typically have to find global scale economies by standardizing production processes rather than through physical concentration, as well as by concentrating the upstream, rather than the downstream, stages of the value chain. The effect of cost globalization drivers, like global scale economies, varies sharply according to the level of fixed costs required to enter an industry (although equipment leasing schemes, or awarding franchises to local investors, provide a way to minimize such entry barriers). So cost globalization drivers may be less favorable for services that are primarily people-based and face lesser scale economies and flatter experience curves. One common solution for the would-be global company is to do as McDonald's does-substitute equipment for labor in order to achieve lower costs and better performance than local companies using traditional business systems. Favorable Logistics Low transportation costs allow concentration of production for physical goods. For services, "customer involvement in production" raises the logistical stakes in globalization. In most people-processing services, the need for convenience prevents concentration. But in some possession-processing services, customers are willing to transport their possessions to another location for better service. Thus, many airlines bring their aircraft to Singapore. Some peopleprocessing services have achieved similar success in having customers come to them. London hospitals maintain a flourishing business among wealthy Middle Eastern patients, as do Miami hospitals for patients from Latin America. Companies have to balance the tradeoffs between logistics and appeal. Disney favored logistics over appeal in selecting northern France rather than southern Spain for the location of Euro Disney. More people can get more easily to the Euro Disney site outside Paris, but once there they often face cold weather and colder service. Service businesses can also create their own favorable logistics. Club Med organizes charter flights from urban centers to its off-the-beatenpath locations. British Airways and Air France provide limousine ground transport to and from their Concorde flights. (Chart Omitted) (Chart Omitted) (Table Omitted) Lastly, logistics is seldom a barrier to globalization for information-based services. Using electronic channels to deliver such services allows providers to concentrate production in locations that have specific expertise and to offer cost savings or other meaningful advantages. For instance, banks in the Cayman Islands are not conveniently located from a purely geographic standpoint, but money can be shipped there electronically to take advantage of the tax benefits conferred by offshore funds status. Information Technology For information-based services, the growing availability of broad-band telecommunication channels, capable of moving vast amounts of data at great speed, is playing a major role in opening up new markets. Access to the Internet or World Wide Web is accelerating around the world. But there may be no need to duplicate all informational elements in each new location. Significant economies may be gained by centralizing "information hubs" on a global basis, as Federal Express does in Memphis. For all three types of services, the use of information technology may allow companies to benefit from favorable labor costs or exchange rates by consolidating operations of supplementary services (such as reservations) or back office functions (such as accounting) in just one or a few countries. While a globalization driver in its own right, information technology also interacts with all of the other drivers. Government Policies and Regulations Host governments affect globalization potential through import tariffs and quotas, non-tariff barriers, export subsidies, local content requirements, currency and capital flow restrictions, technical and other standards, ownership restrictions and requirements on technology transfer. Governments' exercise of these policies and regulations can make it difficult for companies to globalize. For services, "customer involvement in production" may mitigate many government barriers to global strategy. Government drivers are often favorable for people-processing and possession-processing services that require a significant local presence, since they create local employment opportunities. On the other hand, governments often impose regulations to protect home carriers in the case of mobile services, such as passenger and freight transportation. For instance, restricting foreign airlines' landing rights or ability to pick up passengers at an intermediate stop ("third freedom" rights) provides a way to protect home-based airlines on international routes. Nations may perceive both an economic and a cultural threat in unrestricted imports of information-based services through electronic channels. Government regulations range from controls on international banking to bans on private ownership of satellite dishes (as in countries such as China, Singapore, and Saudi Arabia). Some nations are now trying to manage citizen access to the Worldwide Web. For people-processing services, government barriers to global strategy include country differences in social policies (e.g., health) affecting labor costs, the role of women in front line jobs, and the hours or days on which work can be performed. For possession-processing services, tax laws, environmental regulations, and technical standards may decrease/increase costs and encourage/discourage certain types of activity. For information-based services, special policies on education, censorship, public ownership of communications, and infrastructure quality may apply; technical standards may vary; and government policies may distort pricing. Transferable Competitive Advantage The single most important competitive globalization driver arises from transferability of competitive advantage. If one industry participant can leverage its competitive position in one country to build an advantage in other countries, all its competitors need to develop a global strategy too.23 For services, "customer involvement in production," and "lack of inventories" limit the leverage of competitive advantage based on foreign factors of production such as labor productivity (e.g., no "Toyota" exports), although advantage in management systems can be a basis for globalization (e.g., Hilton). So Hong Kong hotel chains, such as Mandarin, Peninsula and Regent, that have set world class standards for service, find such excellence far harder to reproduce as they expand overseas. Similarly, Disney has suffered from not been able to transfer to Paris Disneyland the highly motivated and pliant staff of its U.S. parks. Overall Assessment of Drivers As we look at the three categories of services identified earlier, it seems that most industry globalization drivers do apply to services, but their impact varies by service type and even by industry. For example, government drivers (expressed in terms of economic policy, regulation, and protectionism) are often industry specific (as evidenced by the recent Uruguay Round of negotiations on GATT and bilateral British-American negotiations on commercial air travel). This conclusion highlights the importance of conducting a systematic evaluation of globalization drivers for individual industries, rather than taking generalized views that service businesses can be more (or less) easily globalized than can manufacturing businesses. Service Effects In Global Strategy To complete our analysis, we now present a more detailed view of how each dimension of global strategy might differ for service businesses. We use four dimensions ("global strategy levers") that determine whether international strategy is more multilocal or more global.24 The global end of each dimension consists of the following: Global Market Participation-countries are selected not just on the basis of stand-alone attractiveness, but also in terms of their potential contribution to globalization benefits. Global Products and Services-a standardized core product or service that requires a minimum of local adaptation. Global Location of Value-Adding Activities-the value chain is broken up; each activity may be conducted in a different country, rather than many activities being duplicated around the world. Global Marketing-a uniform marketing approach is applied around the world, although not all elements of the marketing mix need be identical. Services and Global Market Participation A global strategy approach to market participation involves building significant share in globally strategic markets. Such countries are important beyond their stand-alone attractiveness and may be a source of volume to meet economies of scale, the home or significant market of global customers or global competitors, or a major source of industry innovation. Failure to participate in strategic markets can undermine global competitiveness. Many American and European manufacturing companies have suffered from not building significant positions in Japan, thereby limiting their potential economies of scale in manufacturing, lacking exposure to the innovation and high customer standards in Japan, and being unable to create a hostage for good behavior on the part of Japanese rivals. A few Western service companies have built successful businesses in Japan, either because their Western orientation (such as American-style fast food) appealed to Japanese consumers or because they were creating an international network that could not afford to be absent from such a major market. For network firms, such as airlines, financial services, and logistics firms, highly specific geographic locations may be seen as essential. No financial service firm with global ambitions, for instance, can afford not to have a presence in New York, London, and Tokyo. With the exception of such network organizations, it is hard to see how presence or absence in Japan (or any other individual country) significantly affects a service firm's global strategic position, other than contributing revenues and profits. Travel-related services pose an exception. Inherently, wider global market participation makes a brand of service more valuable to a customer. Thus, American Express traveler's checks and credit cards are useful precisely because they are widely accepted in most countries. Similarly, international airlines enhance their appeal as they fly to more destinations. Designing and Delivering Globally Standardized Services Globally standardized products or "global products" are, perhaps, the one feature most commonly identified with global strategy. As mentioned earlier, the fact that services comprise a bundle of core and supplementary services makes them particularly easy to both globalize and localize. In perhaps the most extreme example, McDonald's now plans to open restaurants in India that, in deference to Hindu reverence for cows, will not serve hamburgers at all. Were McDonald's a goods-based business, that would be equivalent to selling a car without an engine. But as a service-based business, the other core and supplementary elements can make up for the lack of beef. McDonald's also adds items, such as Veggie Burgers, to menus to meet local tastes. In Britain, McDonald's includes both tea and coffee in its menus, while in France and Germany it also serves beer. Interestingly, these local variations are in the food itself, the product element, rather than in the service elements. Hewlett-Packard is a global leader in computer-based customer support services for its customers. It maintains a globally standardized set of services that range from site design to systems integration and remote diagnostics. This global standardization includes seamless service at any hour of the day or night from anywhere in the world. Professional service firms vary in their ability to provide a globally standardized service. Some firms, such as those in the accounting industry, face significant international differences in technical standards, making uniformity more difficult. But it is also a matter of strategy. Arthur Andersen has chosen to lead in offering globally standardized services. Its competitors now have to play catch-up. Similarly, advertising agencies face international differences in culture and consumer behavior, but some have chosen to overcome these differences. Global Location of Value-Adding Service Activities Where to locate a business's activities and how to coordinate them constitute critical choices in global strategy. Every functional or value-adding activity-from research to manufacturing to customer service-is a candidate for globalization.25 Traditionally, multinational companies (MNCs) have faced two choices in activity location. The classic MNC strategy has been to reproduce activities in many countries. Alternatively, an MNC can concentrate activities in its home country. The trend in global strategy is to concentrate each activity as much as possible, although not necessarily all activities in the same country.26 As discussed earlier, many service businesses need local presence for their downstream activities. But at the same time, they can take advantage of differences in national comparative advantage to build more efficient and effective value chains. Some service-based businesses conduct key activities that can be conducted in a different country from their customers. For example, some U.S. banks and insurance companies now send checks and claims to be processed in East Asia or in Ireland. McKinsey & Company, the management consulting firm, now sends some of its work for clients from high-cost countries to its offices in low-cost countries like India. To provide its global customer support service, Hewlett-Packard maintains a global chain of activity locations-its more than 30 Response Centers around the world are integrated into a global network headed by four major centers: Bracknell (United Kingdom), Atlanta (Georgia) and Mountain View (California) in the United States, and Melbourne (Australia). Each center is staffed during extended daytime hours, seven days a week, by between 12 and 200 engineers. Problems that cannot be resolved in a smaller center may be transferred to one of the major centers. Because of time-zone differentials, at least one of the major centers is always in full operation at any time. Citibank, one of the world's largest banks, has positioned itself as a "uniquely global consumer bank."27 The company's objective is to allow its customers to do their banking "any way, any where, any time." To provide this service it has expanded its Citicard Banking Centers with their automated teller machines to 28 countries. These centers are globally linked, allowing 24 hour, seven days a week access. And, of course, non-cash transactions can be conducted by phone. Global Marketing of Services