International Issues

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Is the Divide between Goods and Services Redundant? A Reappraisal of the Implications of Product Characteristics on the Process of Firm Internationalization

by Robert Jack, Macquarie University, Australia

It has become a common understanding -- indeed almost a cliche -- to state that services represent the dominant component of the international economy. Typically, services are defined as deeds, processes, and performances. The defining characteristics of services -- intangibility, inseparability, variability, and perishability -- have long been used to make a distinction between services and goods as separate product categories. In contrast to a good, many services involve interactive activities either performed, or directly delivered, by a firm to its customers. The term "inseparability of production and consumption" is applied to describe this service process and emerges as a significant point of difference between services and goods.

However, this straightforward division between goods and services as distinct product categories has been challenged. Instances of services being embodied in a physical format have long been common. Similar to goods, these service products are first produced and subsequently used or consumed by the client. Consequently, although there is an acknowledgement that services do differ in some respects from goods, separability of production and consumption is not necessarily a dividing line between these two product categories. Goods and services, therefore, may co-exist and overlap throughout the production and consumption process.

While de-emphasising the differences between goods and services, others explain that products can contain both good and service components. Early service marketing researchers (see Judd, 1964; Rathmell, 1966; Regan, 1963) used terms such as "productified services," "owned goods services," and "non-good services." Although complex, these terms imply a more unified perception of goods and services. Marketers, in particular, prefer to speak of product continuums with various levels of services contained (I prefer to use the term "embedded") in each product. The use of continuums in product analysis implies that simple distinctions between goods and services are unhelpful. "Product packages" and "offerings" are terms more recently used to describe the productive output of organizations.

This classification takes on increasing relevance as many manufactured goods embody services in their production and distribution. Consumers often buy a final product based on post-sales services such as a maintenance contract, installation, repairs, and training that are deemed indispensable to its utilization. Bowen, Siehl, and Schneider (1989) provided an early, but still insightful, analysis of the myriad of service activities that accompany goods. The authors categorize these into three types. First, there are services related to design that focus on product reliability, making it more reliable in construction. The second set consists of creating a system that concentrates on response time to customers who require service and can include issues such as the number and location of service technicians. The final set of activities aims to reduce risk and includes warranties and service contracts.

Categories by Bowen et al. (1989) imply that the more complex the operation of the good, the higher the service component embedded in it. Similarly, many goods have an inherent client-related service component with maintenance and servicing of the product being undertaken by either the user or the manufacturing firm. The operation and maintenance of these goods are key concerns of end users, whereas the physical features and functions of the good itself, while important, were secondary. Building on elements of Bowen et al. (1989) categories, we can classify these services as "embedded services," with some examples falling into the following categories:

--customised design -- pre-production
--warranties & guarantees -- post-production
--installation -- post-production
--commissioning -- post-production
--maintenance -- post-production
--on-going after sales service support -- post-production.

Therefore, separable products (in the form of manufactured goods) may be dependent on embedded services to ensure their development and use. Manufacturers may embed services into separable products, thereby creating product packages. In common with service characteristics and definitions, the composition of these embedded services may be separable and/or inseparable. Accordingly, a firm may embed a separable product with separable services, such as guarantees and written instructions. In this circumstance, the degree of separability of the firms' product package is high and the embedded services are compatible in separability to the firm's separable product.

Alternatively, firms may embed inseparable services in their product package. Interactive services are commonly an essential part of the firm's product package. Customized design, product installation, product maintenance, training and direct after-sales services are some examples of inseparable embedded services. Therefore, a firm's product is dependent on inseparable services for both pre-production development and post-production use. Embedding these with a separable product will result in creation of a product package with different degrees of separability -- part separable, part inseparable.

The key challenge for many firms adopting this practice is product delivery. Different degrees of separability within single product packages imply increasing complexity in ensuring clients access all components of the package -- particularly when those customers are located across different markets. Firms providing product packages have to incorporate into their strategy the methods by which they will achieve the successful delivery of these packages to their clients.

Depending on the extent of interaction, the inclusion of inseparable services in any type of product package may require the firm to interact with their customers, either directly or via an agent. Therefore, understanding the extent of service inseparability becomes a vital strategic consideration. The firm may be able to provide embedded services without the requirement of interacting with their clients. E-service technologies may be available allowing clients to access additional product services online, without the need to directly contact or interact with the firm.

Even if more direct forms of client/firm interaction are needed, different options may be available. In the same way that products categories tend to be simplified, the nature and extent of inseparability also tends to be assessed in a one-dimensional way. This may be misleading. For example, Hirsch (1989) explains that interaction can take different forms and states that many services do not require continuous interaction between the producer and the consumer throughout the entire production or service delivery process. Hirsch cites the example of consultation. Although consultation may require some form of direct interaction to initiate it, the additional work required to complete the transaction can be done separately from the client. Hirsch defines the extent of interaction in a service as "intensity." In further explaining the concept of service intensity, Hirsch (1989:49) explains:

Interaction can vary in length, it may be continuous or it may be interrupted by one or more intervals. It may take place at the beginning or at the end of the process during which the service is being rendered.

Therefore, the greater the "intensity" of service inseparability, the greater the requirement for direct and continuous interaction between the firm and its clients.

A case study I undertook with an Australian-based manufacturing firm underscores both the complexity of its product package and the challenge that it has in ensuring that all components of its product are accessible to its clients. The CEO of the firm described his product as follows:

Our work tends to go in three discrete phases: --The front end is highly interactive, where you are really defining what it is you are trying to achieve and what you are going to do (let's call this PRE-PRODUCTION embedded services). --The middle bit, which is implementa- tion, which is just doing it and can in fact be done relatively remotely (this represents a tangible PRODUCT). --The final bit is where, if this is the first time you have done something, is very interactive again as well and is usually on site. (Let's call this process POST-PRODUCTION involving embedded services such as installation and ongoing maintenance.)

So you have these two pillars, at the front end and the back end which are very 'on-site' and intensive. The breakdown and description of each activity is instructive and the implications for delivery weigh heavily on the firm's skilled personnel for delivery. Ultimately, the inseparable services described are intensively interactive, but within a prescribed time frame.

An emphasis on understanding such a complex composition of a firm's product has particular relevance to firm internationalization. Most 'modern' theories relating to the internationalization process of firms are based on the behaviour of manufacturing firms. Incremental or staged approaches are presumed to be the most likely internationalization progression for firms entering foreign markets (see the widely cited work of Johanson and Wiedershiem-Paul, 1975; Johanson and Vahlne, 1977, 1990). These theories assume a form of exporting activity before the firm undertakes any direct foreign market presence. Manufactured goods can be exported into these markets as a first stage in internationalization. Over time, exporting can, if desired, lead to more direct entry modes for the firm. This may eventually culminate in a direct market presence, in the form of foreign direct investment.

This approach implies a degree of separability of production and consumption and relates to the internationalization of product offerings consisting primarily of goods. All too often an appraisal of a manufacturing firm's product became incorporated into one large product "basket" with the core product (a manufactured good) representing the reason for a firm's entry mode choice. The likelihood of multiple product characteristics, within a single offering, is rarely acknowledged in the context of internationalization and entry mode choice.

Analysis concentrating on the internationalization of services is largely based on an examination of service providers operating in traditionally defined service sectors or industries. The assumption is maintained that the successful delivery of service products requires some form of direct interaction between the user of the service and the provider of the service. Consequently, service firms will have to enter foreign markets directly to fulfil the needs of customers. Accordingly, service firms may not have the option of exporting, as services cannot be delivered successfully to consumers in this manner. Therefore, service firms base their market entry strategies on their unique characteristics and are presumed to differ from manufacturing firms in their strategic decision making. The relevance of incremental or stages approaches to internationalization by service firms is, therefore, questioned as it may require the firm to 'skip' the export stage when it begins its internationalization process, as it is simply not possible for the firm's product to be delivered to the user via this mode. This situation has been described by researchers as 'leapfrogging' (see Welch and Luostarinen, 1988).

Consequently, an interesting comparison of product analysis emerges. Marketing theories highlight that products are, at times, complex combinations of both goods and services and can include multiple service activities. These merge to form a single product package provided to a firm's clients. This level of product integration implies that a singular analysis of a firm's output may, therefore, understate what firms actually provide to their clients. Alternatively, international business theories generally address manufacturing and service firms separately. The characteristics inherent in these different products underpin the literature concerned with why firms choose particular internationalization strategies. As a consequence, service firm internationalization emphasises the inseparable nature of many services, and the implications this may have for firm internationalization. The interactive delivery of services implies a more direct approach to serving clients in international markets.

Going back to the case study example I highlighted previously, the CEO emphasized the logistical difficulties of deliverying such a complex product package into international markets. Now when you are doing that off-shore, you are looking at the issue of how you are going to have to deal with people for weeks or months overseas interacting with clients.

So here we have a specialist manufacturer, whose chief concern in internationalization is not only the ability of its customers to access its tangible product but how to deliver the pre- and post-production embedded services essential to the products development and use. For the firm's largest international market, the U.S., exporting was supplemented by the simultaneous establishment of a sales and services office. In Asian and European markets, exporting is supported by the combined use of agents and head office staff travelling to clients to deliver the pre- and post-production embedded services.

A reassessment of product characteristics has implications for the deterministic nature of process models, and may mean that the application of the model is dependant on the degree of separability of a firm's product. A consistently high degree of separability across the firm's product package implies that the firm has the option of exporting its product, at least in the first step of its internationalization process. However, firms may find that embedded services that change the separability of the product package could also affect the entry mode choice that they adopt. Some degree of direct interaction may be required for various types of pre- and post-production embedded services, such as customized design, installation, maintenance, and on-going after-sales service support. Therefore, a firm manufacturing an industrial product, which can be exported across international markets, may find that the embedded services essential to its use require the firm to consider a direct presence in the market for consistent and ongoing service delivery and value creation. This could be in the form of a subsidiary (some of my previous research -- see Jack, As-Saber, Edwards and Buckley, 2008 -- showed that this was the preferred method for Australian manufacturers entering the U.K.); a sale and/or service office, the use of an agent or extensive use of head office staff travelling for set periods of time.

So . . . where to from here?

Well, as a starting point, researchers and practitioners need to move beyond an analysis of the firm that describes its productive output as either manufacturing or service based. Then, a more relevant focus on product deliverability could be assessed by determining the degree of separability of a firm's product package. Various categories of product classifications could be incorporated into a continuum, with each category linked to a likely pattern in the process internationalization for firms whose productive output conform to that category. Finally, understanding the different degrees of product and embedded separability can then be analyzed, but within the context of a single product package.

References

Bowen, D. E., Siehl, C., & Schneider, B. (1989). A framework for analysing customer service orientations in manufacturing. Academy of Management Review, 14(1), 75-95.

Hirsch, S. (1989). Services and service intensity in international trade. Weltwirtschaftliches Archiv, 125(1), 45-60.

Jack, R., As-Saber, S. N., Edwards, R., & Buckley, P. (2008). The role of service embeddedness in the internationalization process of manufacturing firms. International Business Review, 17(4), 442-451.

Johanson, J., & Vahlne, J. E. (1977). The internationalization process of the firm – A model of knowledge development and increasing foreign market commitment. Journal of International Business Studies, 8(1), 23-32.

Johanson, J., & Vahlne, J. E. (1990). The mechanism of internationalization. International Marketing Review, 7(4), 11-24.

Johanson J. J., & Wiedershiem-Paul, F. (1975). The internationalization of the firm-four Swedish cases. Journal of Management, 12, 305-322.

Judd, R. C. (1964). The case for redefining services. Journal of Marketing, 28(1), 58-59.

Rathmell, J. M. (1966). What is meant by services? Journal of Marketing, 30(10), 32-36.

Regan, W. J. (1963). The service revolution. Journal of Marketing, 27(7), 57-62.

Welch, L. S., & Luostarinen, R. (1988). Internationalization: Evolution of a concept. Journal of General Management, 14(2), 32-64.

 

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