Services make up the largest share of the global economy. According to the World Bank, in 2022, services contributed about 64.43 percent to the global gross domestic product. However, in our collective imagination, many people see exporting as something linked to product companies only. The most fundamental difference between service and manufacturing firms is the intangibility of services. As a result, service internationalization differs significantly from those of manufacturing firms.
This article aims to shed light on the specificities of internationalization for services firms, emphasizing the need for a strategic and tailored approach. From cultural nuances that impact service delivery to the cross-border regulations, this examination seeks to provide insights that will assist you and your services firms in crafting effective internationalization strategies.
Tangibility of offerings
The major difference between a service and goods manufacturing firm going international is the tangibility of offerings. A company proposing goods deals with tangible goods that can be standardized, personalized and shipped. Products have physical attributes, and internationalization may involve considerations related to manufacturing, logistics, and supply chain management. This specificity requires particular in-house skills. The main disadvantages of international trade for goods firms are transport costs. But also transit times and customs tariffs. A final, less obvious disadvantage is storage. The perfect example is a car manufacturer, the consumer is primarily receiving tangible products, however the manufacturer may package the offering with some intangible elements, such as finance and a warranty period.
On the other hand, service firms offer intangible services that are often customized based on client needs. The internationalization of service companies may rely on human interaction and expertise. You often have to adapt your services to diverse cultural environments. You may consider adapting service delivery models to local preferences. Which also requires special in-house skills. This could include training local staff or partnering with local service providers. Professional service firms, banking and insurance are concrete examples of service firms. As they do not tend to offer anything tangible.
Here are a few examples of service companies that are now present throughout the world. Airbnb is an American multinational online marketplace for lodging and tourism experiences that operates in over 190 countries. The company is known for its disruptive business model and its focus on personalized travel experiences. The second, Booking.com is a Dutch online travel agency that offers accommodation reservations all over the world. The company forms strategic partnerships with local hotels and property owners. The last, IBM is an American multinational technology company that provides hardware, software, and services. The company operates in over 175 countries and is known for its focus on innovation and problem-solving. All these three examples have some in common, the intangibility of their offering.
Entry mode for service firms
Just because you’re offering a service doesn’t mean you shouldn’t think about how you’re going to enter the international market. This is a crucial point for success on international markets. Although new technologies and online services benefit from a streamlined export process driven by high demand, there are limitations to providing services abroad exclusively through remote means, even if you might have a website accessible from anywhere in the world.
A service company can choose to locate closer to its client to better manage time zone differences to major clients. For example, if your company is based in Washington and you work with a customer in Sydney. You will have to deal with a time difference of 16 hours. As we write this article, it’s 10:56 am in Washington and 01h56am+1 in Sydney. This can have an impact on your business, simply because your availability to respond to your customers or organize videoconferences will be very limited. This can have a negative impact on your image. Your customers may perceive this as a lack of responsiveness on your part.
Despite our interconnectivity, it is still relevant to be physically present. Opening an agency to develop your high-potential international markets can be crucial. Of course, one of the counter-arguments is the cost of opening an international office. However, it can be an investment that will open the door to many new customers. Establishing a subsidiary not only helps mitigate client losses stemming from inefficiencies but also addresses service quality issues and the shortage of qualified personnel required for specific operations. For example, if you are a construction design company, your local presence will allow you access to local tenders, to local talents and will reassure the larger investors.
The client proximity ensures you have the capacity to hire a talented workforce. Simply the fact that your employees are from the same nationality as your customers abroad can improve your level of understanding the needs and even sales. They will be familiar with local habits. By the way, you will be able to increase your speed of service delivery.
Cross-cultural challenges in services
Cultural sensitivity is often even more critical for service companies since services are often consumed in real-time. Understanding local business practices and communication styles is essential. Translating service materials accurately is indeed important. The language used in marketing materials, customer support, and service delivery should resonate with the target audience. Depending on the country, it is unacceptable to receive reports from a design company or a consulting company other than in the national language.
Your knowledge of the market, thanks to your local talent and your market research, enables you to adapt your services to meet the specific needs and preferences of the target market. Also, one of the aspects less mentioned is the adaptation of your pricing strategies. Service exporters need to consider local economic conditions and competitive landscapes when determining pricing structures. Flexible pricing strategies may be necessary to remain competitive while maintaining profitability.
In 2010 Netflix was only available in the United States. Today, Netflix is available for streaming in over 190 countries. The catalog of series and films varies from country to country and over time. Sign of a strong adaptation strategy. To achieve this, the company is producing content that appeals to regional preferences. There is also a strong pressure from the local government to protect the local industries. Additionally, Netflix forged strategic alliances with local telecommunications and cable providers to provide combined services. Naturally, Netflix is working hard to translate its content and interface so that it can reach its target countries more easily. “We think of subtitles and dubs as really enabling access to the story, and so our goal is to use creative intent to really create culturally relevant and resonant translations for the content so that it has a wide global appeal.” Denny Sheehan, Director of Content Localisation and Quality Control at Netflix.
Risk & Investment
A goods company expanding internationally through a subsidiary will have to make costly investments. This may require significant upfront investment in manufacturing, inventory, and distribution infrastructure. As far as the main risks are concerned, this type of company faces risks including fluctuations in currency exchange rates and potential challenges in managing global supply chains.
Service companies may have lower upfront investment in physical assets but may face challenges related to finding and retaining skilled personnel in different markets. In fact, the main resource of service companies is their staff. Depending on the country, it can be difficult to recruit qualified people.
Opportunities in emerging markets
Rapid development in emerging economies has provided new opportunities for internationalization in the service sector despite the fact that the service value added share in GDP tends to be lower than in developed economies. For example, according to the World Bank, In 2021, the value added of services in Indian GDP will represent 47.9% compared with 77.6% in the United States. This is reflected in a diversification of inward FDI towards services. According to OCDE “Analysis shows that since 2010, emerging markets have diversified FDI inflows, moving away from extractive industries and towards more value-added sectors, such as information and communications technology (ICT) and business services. “.
Improvements in technology have allowed the increase of production and consumption for some services. Allowing them to be traded more readily due to the use of technology. In Asia, according to OCDE estimates show that in just a year, from 2019 to 2020, the number of e-commerce users increased by 37 million in ASEAN, 71 million in China and 50 million in India.. These opportunities are also accompanied by a number of challenges for service providers. The use of technology is not as widespread in emerging economies and the supporting infrastructure may not be fully developed.
In addition to technology, social, and economic factors also represent important considerations for services firms intending to expand in emerging markets. Consumer demographics, income levels, cultural beliefs, and social structure differ across countries, and the distinctions between emerging and developed economies can be stark.
The unique characteristics of services, such as their intangibility necessitate a nuanced approach to international expansion. Services firms need to recognize the importance of adapting their offerings to meet the diverse local specificities, regulatory, and economic environments of different countries. Moreover, building strong relationships with local partners in each target market is essential. The method of entry is also a determining factor in your success. Think about the extent to which you need to have a physical presence in your target country. By embracing these factors, services firms can position themselves for sustainable growth and success in the global markets.
Prime Target can accompany you in your international business project, with decades of experience and a far-reaching international physical network. PrimeTarget’s Market Ranking Report (link) can help you evaluate the market potential of 5, 10 or 20 countries simultaneously, and identify new export markets with the highest potential. This comprehensive and personalized Market Ranking Report can minimize risk, saving time and money, as well as identify new business opportunities abroad.