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 International Marketing Review
Value creation logics and internationalization of service firms
Peter D. Ørberg Jensen Bent Petersen
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Peter D. Ørberg Jensen Bent Petersen , (2014),"Value creation logics and internationalization of service
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Value creation logics and Value creation

logics
internationalization of
service firms
Peter D. Ørberg Jensen and Bent Petersen 557
Department of Strategic Management and Globalization, Received 12 September 2013
Copenhagen Business School, Frederiksberg, Denmark Revised 4 July 2014
19 August 2014
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Accepted 22 September 2014

Abstract
Purpose – While mainstream theories in international business and management are founded
either explicitly or implicitly on studies of manufacturing firms, prior attempts to develop theory
on the internationalization of service firms are sparse and have yet to establish solid and
comprehensive frameworks. The thrust of this study is that value creation logics, a construct
originally developed by Stabell and Fjeldstad (1998) can assist us in better understanding why and
how service firms internationalize. The authors extend this construct and propose that the
internationalization of service firms must be based on a thorough understanding of the fundamental
nature of these firms.
Design/methodology/approach – Theoretical study.
Findings – The authors put forward propositions concerning the pace of internationalization and the
default foreign operation modes in service firms.
Research limitations/implications – The use of value creation logics can be a useful complement
to the conventional approaches to the study of service firms’ internationalization. However, the fact
that most firms encompass more than one value creation logic complicates the use of firm databases
and industry statistics.
Practical implications – The authors suggest that managers in service firms should consider
primarily the nature of the value creation logic(s) in their firms when deciding and designing an
internationalization strategy.
Originality/value – The study presents a novel theoretical approach and a set of propositions on
service firm internationalization founded on the specific characteristics of the service activities.
Keywords Internationalization, Strategy, Services, International business, International management,
Value chain
Paper type Conceptual paper

1. Introduction
Since its introduction in 1985 the value chain of Michael Porter (1985) has been
a key concept and the standard template in the study of value creation processes of
firms. However, as Stabell and Fjeldstad (1998) point out, the value chain designates
first and foremost the value creation logics of manufacturing firms and less so the
logics of service firms. The value chain signifies operations in which raw materials
are transformed to semi-manufactured or further on to finished, physical goods.
The primary value chain activities define themselves in a certain sequential order of
upstream and downstream activities. Service firms like banks, insurance companies,
and telecommunication firms do not fit this value chain logic very well. Value creation
logics other than the value chain have therefore been warranted for a better understanding
International Marketing Review
Vol. 31 No. 6, 2014
The authors wish to thank Gabriel R.G. Benito, Øystein Fjeldstad, Randi Lunnan, Amir Sasson, pp. 557-575
© Emerald Group Publishing Limited
and participants at the workshop on Service Firm Internationalization at the Copenhagen 0265-1335
Business School, June 2013, for numerous inspiring discussions. DOI 10.1108/IMR-09-2013-0187
 IMR of service firm behavior, including that of internationalization. The thrust of this paper
is that value creation logics (Jensen and Petersen, 2012; Möller, 2006; Stabell and Fjeldstad,
31,6 1998) can assist us in better understanding why and how service firms internationalize.
Our current understanding of service firms’ internationalization is mainly a result of
industry studies (e.g. Coviello and Martin, 1999; Engwall and Wallenstål, 1988; Gripsrud
and Benito, 2005; Hertz, 1993; Sarkar et al., 1999; Villar et al., 2012) and studies based
558 on the core attributes that distinguish services from goods: namely heterogeneity,
intangibility, perishability, and inseparability between production and consumption
(Boddewyn et al., 1986; Cohen, 2012; Lovelock, 1983, 1991; Sasser et al., 1978; Zeithaml
et al., 1985). These two approaches to the study of service firms’ internationalization[1]
have indisputably served us well; however, they also have some flaws and deficiencies
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(that will be accounted for in the next section). We use value creation logics to remedy, at
least partially, these deficiencies of the two approaches to service firm analysis.
Furthermore, we submit that value creation logics can provide us with new insights
as to why and how service firms internationalize. More specifically, in relation to the
why question we submit that the various value creation logics differ significantly as to
the associated advantages of internationalization: for some value creation logics the
underlying drivers of internationalization are rather weak, to others the drivers are
very strong. Institutional barriers, in particular local concessions, may, however, negate
innately strong internationalization drivers[2].
Together with the institutional barriers to internationalization the inherent
advantages of internationalization associated with particular value creation logics
define the pace by which firms expand internationally. This links to the how question,
including the enduring discussion of incremental vs accelerated internationalization
processes (for an overview of this discussion, see Rialp et al., 2005). Furthermore, we
advance the existing knowledge about entry modes of service firms from mainly
distinguishing between export and non-export (contractual and investment) modes to
differentiating between several foreign operation modes – some of which seem distinct
for one particular value creation logic.
With this account of our intended contribution, the paper proceeds as follows: in the
Section 2 we explain why we need value creation logics and we consult the marketing
and strategy literature to define the fundamentals of these logics. Based on these
fundamentals we identify five different value creation logics of services. Using the
value creation logics we address the question of why service firms internationalize
(Section 3). We determine advantages of internationalization on the basis of demand
(value proposition) and supply (capacity and capability) drivers associated with the
individual logic. In Section 4, the value creation logics are used to cast light on how
service firms internationalize in terms of speed and entry mode. For each value creation
logic we develop propositions as to the pace of internationalization and the “default”
foreign operation mode, as we assume that institutional barriers do not bar or impede
the foreign market entry in order to distill the theoretical essence of the propositions.
In Section 5, we conclude and point to some perspectives, as well as limitations, in using
the value creation logics. Finally, some further research avenues are suggested.

2. What are value creation logics and why do we need them?

Industry studies benefit hugely from the availability of data, but the classification of
industries is based on a mix of various ad hoc criteria (characteristics of the physical
output, technology, government regulation, targeted customer segments, etc.) that
tend to ignore strategically important differences within the individual industry or,
 equally important, similarities across industries. Hence, by using conventional industry Value creation
classification we may miss out on important strategic differences within the individual
service firms registered in an industry as well as overlook similarities across industries.
logics
Take the banking industry as an example of intra-industry differences. Banks are
founded on two very different value creation logics, insofar as they usually provide two
distinctively different services: connecting and advising clients. “Connecting” is a
network service, whereas “advising” is a consultancy service. Conversely, the use of 559
conventional industry classification may neglect inter-industry similarities: seemingly
quite different, banks and social network firms are nonetheless sharing the same value
creation logic: they create value by connecting people. As such, social network firms are
potential entrants in the bank industry – and vice versa.
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The studies that focus on the core attributes of services (different from goods)
essentially lump together all service firms into one sector (Boddewyn et al., 1986),
though the service firms may be differentiated as to how distinct the attributes of the
offered services are. In its most simplistic, dichotomous form, services are categorized
as being either “hard” or “soft” (Brouthers and Brouthers, 2003; Ekeledo and
Sivakumar, 1998; Erramilli, 1990). The obvious advantage of this sector approach is
that differences between service and manufacturing firms are spelled out. As an
example, export is excluded as a mode of internationalization for firms offering “soft”
services: these firms are confined to use contractual and investment modes of operation
(Erramilli, 1991; Erramilli and D’Souza, 1995; Erramilli and Rao, 1993). On the other
hand, by lumping together all service firms in one sector we may miss out on important
differences in terms of value and cost drivers (Porter, 1985, 1991), sources of competitive
advantage (Lippman and Rumelt, 1982; Dierickx and Cool, 1989; Barney, 1991),
internationalization (Johanson and Vahlne, 1977; Hill et al., 1990; Rialp et al., 2005), etc.
Hence, in a value creation logics perspective, the variety between two service firms may
be just as significant as the difference between a service firm and a manufacturing firm.
As an example, in terms of internationalization, the network services of a
telecommunication firm differ from the products of a manufacturing firm no more or
less than they differ from the consultancy services of an engineering firm.
Both the marketing and the strategy literature have adopted the concept of value
creation logics, but, not surprisingly, from different points of departure. As a consequence,
the understanding of value creation logics differs quite significantly. The marketing
literature by default sees value creation logics as a dyadic process in which the firm and
its customers jointly create value (Grönroos, 2011; Priem, 2007; Ritter et al., 2004; Walter
et al., 2001). In other words, “co-creation” (Möller and Törrönen, 2003; Prahalad and
Ramaswamy, 2004; Vargo et al., 2008) is a key construct, though the analysis may be
extended to include value capture as a “value sharing” process (Möller, 2006).
The strategy literature, in contrast, is more focussed on the firm-internal value
creation processes-strategy as the art of creating value (Bowman and Ambrosini, 2000;
Lepak et al., 2007; Normann and Ramirez, 1993). To the extent value creation is
recognized by strategy scholars as an inter-firm outcome (e.g. Dyer and Singh, 1998;
Nahapiet and Ghoshal, 1998), they seldom apply demand side or end user perspectives.
Furthermore, when the analysis extends to value capture (Foss and Foss, 2005; Johns,
2006; Lepak et al., 2007) the focus is on competitors, rather than on customers,
suppliers, employees, or other stakeholders. In the strategy view, value creation is
mainly treated as a supply-side phenomenon with the resource-based view (Barney,
1991; Dierickx and Cool, 1989; Lippman and Rumelt, 1982; Wernerfeldt, 1984) as the
default theoretical foundation. It is worth noting that Porter’s value chain perspective
 IMR (Porter, 1985) essentially pioneered the RBV. Hence, the demand side perspective is
rarely used in the strategy literature, although strategists in recent years have shown
31,6 a growing interest in the role of customers in the value creation process (Priem, 2007;
Ye et al., 2012). The strategy researchers Stabell and Fjeldstad (1998), who forcefully
promoted the value creation logics concept, used cost as well as value drivers to
characterize their three identified logics (of which the “value chain” made up one).
560 The three logics, though, were based on Thompson’s (1967) distinction between
technologies – long-linked, intensive, and mediating – the purpose of which primarily
was to predict organizational structures; again, a supply-side perspective.
In a nutshell, the difference between the marketing and strategy researchers’
understanding of value creation logics is that they see value creation as, respectively,
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value perceived by, and partially created by, customers-in contrast to value as created
by a firm or firms in collaboration. Ideally, our definition of value creation logics should
reconcile these two “complementary” understandings of the concept, though our basic
perspective is that of the firm. In other words, the definition should comprise a demand
as well as a supply-side dimension, but still see things through the lenses of the firm.
We therefore introduce “value proposition” (rather than “customer-perceived value”) in
our definition. With these considerations, we define a value creation logic of a firm as
the possession of capacities and/or capabilities that in combination with a specific
value proposition provides an economic rent potential.
It should be clear from this definition that value creation logics have both a supply and
demand side. The possessed capacities (e.g. scale economies) and capabilities (e.g.
management skills) make up the supply side, the value proposition the demand side.
Inasmuch as customers, and not firms, define and determine the value of a service – the
“value-in-use” (Anderson et al., 2006; Bowman and Ambrosini, 2000) – service firms can
only make value propositions (Vargo and Lusch, 2004; Priem, 2007). It is therefore
implicitly assumed in our definition that a firm’s value proposition is perceived
to be valuable by customers – namely to the extent that they are willing to pay for the
offered service (i.e. it has an “exchange value”)[3]. It is also an implicit assumption
that a firm can only generate rent if it fulfills two conditions – of course, in addition to the
conditional presence of an exchange value of the offered service (the value proposition):
first, the firm has to possess capacities and/or capabilities superior to those of competitors
which may try to make similar value propositions. In other words, the firm must have a
competitive advantage in relation to the value proposition in question. Second, the firm
should be able to capture enough of the exchange value to generate rent. Hence customers,
particularly if they are few and collusive, or governments using their power to impose
price ceilings or taxes on the offered service, may appropriate the lion’s share of the value
and render the firm with little or no rent at all. Hence, our definition says “rent
potential” – indicating that a firm’s value creation alone does not generate economic rent;
that does only value creation and value capture in conjunction (Lepak et al., 2007; Priem,
2007). In this paper, we focus on the first necessary, but not sufficient, profit condition – the
existence of capacities and capabilities – and leave aside the second condition: the ability to
capture value vis-à-vis suppliers, customers, governments, and other external stakeholders.
We should also emphasize that our definition of value creation logics disregards a
broader, societal perspective[4]. Furthermore, the definition does not imply an answer
as to how the required capacities and capabilities are employed in order to forward
the value proposition. This is a business model issue, rather than a value creation
logics issue (see e.g. Zott et al., 2011). Furthermore, our definition signifies a single
value proposition and is silent about the possibilities for firms to make more than one
 value proposition, i.e. several service offerings. In fact, most business models would Value creation
include several value propositions, saying that firms usually adopt more than one
value creation logic. Inasmuch as a business model encompasses a firm in its entirety
logics
(Zott and Amit, 2010) whereas firms, as a general rule, comprise more than one value
creation logic, the latter is to be considered a conceptual subset of the former-and
should be researched and theorized as such.
Our next step is to identify value creation logics for service firms. In accordance with 561
our definition we distinguish value creation logics by two dimensions: a value
proposition and the capacities and/or capabilities required to turn this value
proposition into economic rent. We can identify five value creation logics of services
that differ distinctively in terms of their value propositions as well as the required
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competences and capacities – see Table I. The value creation logics of goods production
are just included in Table I as a reference point[5]. Note that there is no intrinsic
ordering to the five value creation logics of services:
(1) analytics services;
(2) facility services;
(3) entertainment;
(4) logistics services; and
(5) network access services.
The value proposition analytics services are about identifying, specifying, and solving
client problems. Analytics services are pretty much the equivalent of “professional
services” offered by law firms, accounting firms, consulting engineers, architects, doctors,
etc. Competencies, rather than capacity, constitute the essential resources. The service
provider must possess domain knowledge, analytical skills and a thorough knowledge of
the client’s preferences and routines. Examples of prominent firms that offer analytics
services (and sometimes other services as well) are: McKinsey, Tata Consultancy Services,
the WPP Group, DDB, Goldman-Sachs Private Equity Group, and DNV (Veritas).

Value creation logic Value proposition to the customer Essential capacities and capabilities

Production of goods Providing goods that enhance the
abilities and/or well-being of the users
Analytics services Identifying clients’ needs or problems
and giving advice to their fulfilment/
solution
Facility services Safeguarding, maintaining and
facilitating the use of, goods, and
properties
Entertainment Giving the client experiences that are
exciting, stimulating, and/or relaxing
Logistics services Safe and timely transport or storage of Capacity allowing full exploitation of
goods, equipment, data, money, and
persons
Network access Giving access to networks of
individuals/firms w/supplemental
social or economic interests
Domain knowledge of linkages and
lean production principles
Analytical skills and thorough
knowledge of client preferences and
routines
Expertise in recruiting, training, and
motivating staff
Possession of artistic or creative talent
and ability to envisage or produce new
fads
scale and scope in logistics operations Table I.
Value creation logics of
Capacity ensuring network services distinguished by
externalities and capability of avoiding value proposition and
adverse selection essential resources
 IMR Facility services are about fulfilling customers’ physical needs for food,
accommodation, exercise, hygiene and safety as well as repair and maintenance
31,6 related to the customer’s property and belongings. Human resource management – the
recruitment, training, motivation and retention of personnel – is an essential capability.
Prominent facility service firms include Johnson & Johnson, the ISS Group, Hertz, the
InterContinental Hotel Group, G4S, Securitas AB, McDonald’s, and 7-Eleven Inc.
562 The next value proposition, entertainment, revolves about experiences that are
stimulating and/or relaxing for the customers. It is essential that the provider of
entertainment services hosts individuals with a unique artistic, sporting or creative
talent. The provider should also be able to anticipate or create new trends and fads.
As with facility services human resource management is critical: it is vital to create
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a work environment where the employees’ creative abilities will come into play.
Well-known providers of entertainment services include Cirque du Soleil, the Walt Disney
Company; News Corp, Thomson-Reuters, Warner Music Inc., Manchester United, Betsson
AB, and Rovio Entertainment Ltd.
Logistics services are about the safe and timely transportation and storage/
containment of cargo and people[6], but also data and money. Capacity utilization
through scale and scope advantages appears essential for providers of logistics
services, including such firms as FedEx, Lufthansa, DB, Maersk Line, Schurgaard Self
Storage, Aldi GmbH, EMC2, Vodafone, and PayPal.
The fifth and last value proposition is network access. Here, the customers are given
access to a network of people or companies with common social and/or economic
interests. As such, this is the basic value proposition of the financial sector (banks,
pension funds, mortgage institutions, insurance companies, leasing, and factoring
companies), but also recruitment and dating bureaus, travel agencies, and various
brokerage firms (ship brokers, dealers, etc.). The essential resources on the supply side
include first and foremost capacity to ensure network externalities as well as screening
capabilities for avoiding adverse selection that might compromise the value of network
access (Akerlof, 1970; Cawley and Philipson, 1999). Network externalities (Katz and
Shapiro, 1985; Shapiro and Varian, 1999) are usually described as economies of scale
generated on the demand side: the value of the service (the network access) for each
customer increases with the number of other customers using the service (the network).
Ceteris paribus, a large, worldwide network is more valuable to the individual customer
than a small, local one. Major providers of network services include HSBC, Banco
Santander, NASDAQ OMX Group Inc., Allianz, Carlson Wagonlit Travels, Hamptons
International, Sotheby’s, eBay, Alibaba, Facebook, Twitter, and LinkedIn.
These five service categories or value creation logics make up a typology (different
from a taxonomy) in as much as we derive the categories on a deductive and conceptual
basis-rather than an empirical basis (Bailey, 1994, e.g. through cluster analysis of
observable and measurable characteristics. Furthermore, the categories are to be
considered as nominal rather than ordinal, or interval, scales, where the latter two
would have a clear ordering, e.g., given by the extent to which the categories assume
the attributes of services (e.g. a continuum from hard to soft services).
Our guiding deductive principle for deriving the different value creation
logics is that the underlying service categories and customer needs should be
universal – meaning that they should apply independently of technological and
institutional changes across time. Take the analytics services as an example of
this universal character: medical doctors have offered their analytic (clinical) services
throughout history based on the same value creation logics – namely identification
 (diagnosis) and solution (treatment) of clients’ (patients’) problems (diseases) (see Value creation
Thompson, 1967). The logic remains the same although the health services, of course,
have improved tremendously through history thanks to scientific/technological
logics
progress and public regulation. The same liberation from technology and institutions
apply for the other four value creation logics. The same principle of universality applies
to the supply side: the essential capacities and capabilities are independent of
the prevailing technological and institutional conditions. In a historical perspective, the 563
only really new thing about value creation logics is that nowadays firms, rather than
states and individuals, are providing most of the goods and services we consume.
Our discussion of value creation logics in relation to business models suggested that
the concept may explain the behavior of service firms in general. However, we want to
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explain service firms’ internationalization specifically and value creation logics seem
capable of providing us with some new insights as to the general questions of why and
how service firms internationalize. In the next two sections we will use value creation
logics to cast light on these two questions.

3. Why do service firms internationalize?

Basically, firms-manufacturing as well as service firms – internationalize for three
reasons: one reason is that firms already possess a homegrown competitive advantage
that they want to exploit outside their home market (Buckley and Casson, 1976;
Dunning, 1980, 1988; Johanson and Vahlne, 1977). This is the mainstream explanation
of manufacturing firms’ internationalization. Another reason is that firms have a
homegrown competitive advantage but have to internationalize in order to retain that
advantage. This is the follow-the-client internationalization trajectory of many
professional service firms, such as consulting firms, lawyer firms, and accounting firms
(Gaedeke, 1973; Daniels et al., 1989). As a third reason firms may internationalize
because they can obtain a competitive advantage by going abroad, e.g., by preempting
scale economies in an industry (Contractor, 2007; Hennart, 2007) or by getting access to
strategic assets. We will focus on the second and third reason because they seem
especially relevant for service firms. The six value creation logics (production of goods
included) are, prima facie, likely to have the same prospects of developing homegrown
competitive advantages. Hence, our focus is on internationalization as a keeper or lever
of competitive advantage. For these two internationalization motives we assume that
the six value creation logics (including production of goods), ceteris paribus, differ
significantly in terms of how advantageously internationalization appears to be.
Internationalization of goods and services may have advantages both on the supply
and demand side. On the demand side internationalization may imply a higher value of
the product offering as perceived by the customers. This is the value proposition driver
of internationalization. On the supply side internationalization may entail better
capacity utilization (through scale and scope economies) or give access to strategic
assets, such as individuals with unique skill sets (Manning et al., 2008). This is the
resource driver of internationalization.
As indicated in Table II we can identify three value proposition drivers of
internationalization:

(1) brand recognition through global presence;

(2) worldwide supply and distribution; and
(3) worldwide connectivity (network externalities).
 IMR Value creation Value proposition drivers of Capacity and capability drivers of
31,6 logic internationalization internationalization

Production of Enhanced brand recognition and Scale and scope economies, factor cost
goods worldwide follow-the-customer differentials
offerings
564 Analytics Enhanced brand recognition and Scope economies, factor cost
services worldwide follow-the-client service differentials and worldwide access to
skill sets
Facility services Enhanced brand recognition and Scope economies
worldwide follow-the-customer service
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Entertainment Enhanced brand recognition Scale economies, factor cost

differentials, and worldwide access to
skill sets
Table II. Logistics services Worldwide supply and distribution Scale and scope economies
Value creation service
logics and drivers of Network access Worldwide connectivity Scale economies in the form of network
internationalization externalities

Brand recognition is of particular relevance to analytics services, facility services and

entertainment. Recognition of brands across country markets lower customers’
uncertainty about the service quality. Poor service quality is less likely when the firm
offering the service really cares about its reputation; and, all else being equal, such
carefulness is more likely if a valuable, international brand is at stake (Kay, 1993).
Furthermore, as multinational firms in general are larger and more well-established
than purely domestic firms, the risk of market exiting is perceived to be less for the
former firms. The risk of market exit is critical for services, such as engineering of large
infrastructure projects, where the costs of switching service provider are high.
Worldwide supply and distribution is an important value driver of logistics services.
Worldwide connectivity entails network externalities (Katz and Shapiro, 1985) – a
strong value driver for network access services.
As regards capacity and capability drivers of internationalization there also appear
to be three sources:
(1) factor costs differentials;
(2) access to strategic factors; and
(3) scale and scope economies.
All five value creation logics may exploit factor cost differentials as a means to drive
down unit costs. The offshoring of back-office activities (IT, finance and accounting,
etc.) and some front-office activities (notably call center services) from high-cost to
low-cost labor countries is a common trait of the logics. However, for some analytics
services firms originating from high-cost countries like the USA (e.g. Accenture
and PWC), offshoring of front-office activities (auditing, risk assurance, finance and
accounting, engineering, etc.) has become an imperative for minimizing costs as well as
for getting access to pools of highly qualified people. Hence, factor cost differentials
and worldwide access to skill sets are indicated as drivers of internationalization for
analytics services. Entertainment services (e.g. development of computer games) share
these two drivers of internationalization. All five value creation logics have in common
scale and/or scope economies as drivers of internationalization. As an example, scale
 economies drive down costs for some entertainment services. National lottery firms may Value creation
collaborate about joint – and larger-prize pools thereby getting more attention from people
with a passion for playing lotteries. For the other value creation logics it is scope, rather
logics
than scale economies that-through internationalization-drive down unit costs.
The value proposition and resource drivers in conjunction determine whether
a value creation logic associates with a weak or strong advantage of
internationalization, and as we conjecture in the next section, strong advantages are, 565
ceteris paribus, resulting in fast internationalization, weak advantages in slow
internationalization. Table II summarizes the demand-side and the supply-side drivers
associated with the various value creation logics. In relation to logistics and network
access services it is remarkable how value proposition drivers are creating
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a strong impetus for internationalization. In other words, in relation to these two

value creation logics it really matters to the customers whether or not the value
proposition is local or global.

4. How do service firms internationalize?

Firms’ internationalization is a multidimensional construct encompassing several
aspects-including management diversity (Nielsen, 2010), international strategy (Bartlett
and Ghoshal, 1989), geographical diversification (Hitt et al., 1997), pace (Petersen and
Pedersen, 1999; Rialp et al., 2005), and foreign operation mode (Anderson and Gatignon,
1986). We focus on the two last-mentioned dimensions. It is clear that the drivers of
internationalization accounted for above qualify as predictors of the pace by which
service firms tend to expand internationally. It is perhaps less obvious that we also
can predict something about the default operation modes of service firms. However,
with the combined use of insights from the entry mode literature (Anderson and
Gatignon, 1986), including internalization theory (Buckley and Casson, 1976), industrial
organizational (Chandler, 1990; Lieberman and Montgomery, 1988) and organizational
learning (Argyris and Schön, 1978; Nonaka and Takeuchi, 1995) we can translate
internationalization drivers into foreign operation modes of service firms.

4.1 Pace of internationalization

Whether the advantage of internationalization, as determined by the supply and
demand oriented drivers, is weak or strong for a service category has, all else
being equal, direct implications for the pace by which the services are internationalized.
A strong (weak) advantage of internationalization would imply a fast (slow)
internationalization. However, in practice, “all else” than supply and demand drivers is
far from being equal. For some services, in particular logistics and networks,
internationalization is subject to harsh government restrictions (Dahringer, 1991); most
notably concessions held by local incumbent firms, but local content requirements and
censorship may also restrict the entry of foreign services firms. Hence, the difference
between unrestricted and restricted internationalization in terms of pace is sometimes
immense – even within the same value creation logic.
A comparison of the internationalization of the network services of retail banks with
that of social networks services of, e.g., Facebook and Twitter, is astounding. Even
though network externalities and scope economies apply to both types of network
services, the internationalization of retail banking services has been held back by
institutional (concessional) barriers for decades – even centuries – (though, now
catching up) whereas the largely unrestricted globalization of social network services
has only taken a few years.
 IMR 4.2 Default modes of foreign operations
31,6 The idea of predicting foreign operation modes for various types of services is, by no
means, a new one (Boddewyn et al., 1986; Erramilli, 1990; Coviello and Martin, 1999;
Carneiro et al., 2008). As pointed out by Erramilli (1990, p. 160): “[…] the entry mode
options available to the manager in the same [service] industry, or even firm, could be
different for different services.” In a similar vein, Carneiro et al. (2008, p. 99) concluded
566 that “[…] a categorization of services based on strategic dimensions, and not on
industry boundaries, […] better reveal the characteristics of services that might
influence internationalization paths […].”
However, to assert that foreign operation modes of service firms are determined only by
their value creation logics would be a very simplistic presentation of realities. First, host
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country institutions may put restrictions on certain operation modes (e.g. Meyer, 2001; Luo,
2001). Second, various firm attributes, such as resources and international experience,
affect the entry mode choice (Erramilli, 1991; Zahra et al., 2000), and so do also owners’/
managers’ risk perceptions and preferences (Ahmed et al., 2002; Brouthers and Brouthers,
2003). Furthermore, cognitive limitations of decision-makers may exclude certain
configurations in the first place; not only in terms of considering the full palette of
operations modes (Calof, 1993; Benito et al., 2009), but indeed also as regards a thorough
comprehension of the value creation logics encompassed by a firm (Normann and Ramirez,
1993). As a last caveat, our predictions of foreign operation modes used in relation to the
five service categories take into account not only the advantages of internationalization, but
also the fact that homegrown advantages may drive internationalization and co-determine
the choice of foreign operation modes. In conclusion, we can only propose default operation
modes, i.e. the preferred organizational form of the individual service category (value
creation logic), when assuming away all the above-mentioned co-determining factors.

4.3 Propositions about internationalization pace and default operation modes

Our first proposition concerns analytics services. Brand recognition, factor cost
differentials, and scope economies drive internationalization of analytics services, but
the requirements for deep knowledge of, and familiarization with clients emphasize
a liability of foreignness (Zaheer, 1995). The high knowledge-intensity as well as the
firm- and client-specificity characterizing analytics services suggest that greenfield
FDI is the obvious choice of foreign operation mode. This is particularly the case
for analytics services firms with strong, homegrown concepts and methodologies
underpinning their services. Such firms will be prone to greenfield FDI as the
possibility for ingraining new staff with firm concepts, methods, and organizational
culture over time, is more favorable than in other foreign operation modes.
For example, in an acquisition scenario, the acquiring firm inherits all aspects of the
acquired firm. Not all of these aspects, e.g., culture, habits, power and hierarchy within
the acquired firm may be conducive to achieving the objectives of the acquiring firm.
McKinsey, the consulting firm (already mentioned as an example above) illustrates a
type firm that pursues an internationalization strategy with greenfield FDI.
Because of these specificities and the causal ambiguity of analytics services it is
difficult to draft contracts with foreign partners. As greenfield FDI implies organic
growth, in contrast to acquisition FDI, this sets limits to the pace of internationalization.
The analytics services have to be established from scratch in each foreign market
entered. The recruitment (headhunting) and training of new staff takes time and so
does also the establishment of a local customer portfolio. Obviously, there is
heterogeneity among analytics services firms. Analytics services firms with a less
 concept-driven business model and, consequently, more ad hoc customized services Value creation
may have other internationalization motives than the “McKinsey-type” firm alluded to
before, such as expanding in size beyond the home market, or learning and exploring
logics
synergies from an expanded, international organization. It is likely that this type of
analytics services firms more often than the “McKinsey-type” firm engages in foreign
acquisitions instead of greenfield FDI. However, taking the “McKinsey-type” firm as an
exemplar for analytics services firms, we conjecture the following proposition: 567
P1. Analytics services are associated with greenfield FDI as the default foreign
operation mode and with a slow pace of internationalization.
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Brand recognition and reputation are essential in relation to facility services. As such,
franchising appears as the natural choice of foreign operation mode (Contractor and
Kundu, 1998; Baena and Cervino, 2012). On the supply/resource side the drivers of
internationalization, including scale and scope economies and factor cost differentials,
are rather weak in comparison with other value creation logics. However, in particular
in cases where firms apply a concept replication strategy across borders may scope
economies drive the internationalization of facility services. We have already pointed to
the crucial role of human resource management in relation to facility services. The time
consuming tasks of selecting, recruiting, training, and motivating staff add to moderate
the pace of internationalization. Therefore:

P2. Facility services are associated with franchising as the default foreign operation
mode and with internationalization at a slow to moderate pace.

The prediction of internationalization of entertainment services is somewhat tricky

inasmuch as the services fall in two distinct groups: one group consists of “live” events,
i.e. entertainment services that are performed live in a specific location and not transmitted
in electronic form. As an example, a Broadway show may leave New York for an
international tour and not broadcast on TV or being recorded (and subsequently uploaded
to YouTube). For such “live” entertainment internationalization implies touring around
with actors, musicians, technicians, and other crew members. The performance in foreign
countries resembles project export where firms temporarily expatriate engineers,
architects, builders, and other tradesmen to the foreign site. A local office is established
during the project period. So, in the absence of better terms we associate the
internationalization of “live” entertainment services with project export. Sometimes
musicals, theatre plays, and other shows can be licensed to foreign/local business entities.
Licensing is thus a supplement to project export, and the two make up the default foreign
operation modes for “live” entertainment services. For these “live” entertainment services
the internationalization drivers are moderate. Some customers might appreciate and
prefer internationally recognized entertainment, but the added perceived value is
presumably limited. Scope and scale economies are, at best, low. Hence:

P3a. “Live” entertainment services are associated with project export or licensing as
the default foreign operation modes and with a slow pace of internationalization.

The other group of entertainment services consists of digitized entertainment, such as

movies, computer games, and online betting platforms – services that can be stored,
reproduced, and transmitted across borders. Due to substantial scale economies-high
 IMR production costs but negligible reproduction costs – the internationalization advantage
is accordingly strong. To the extent the entertainment services are digitized there is
31,6 little need for moving abroad or involving foreign partners. Export, therefore, is the
sole default foreign operation mode for digitized entertainment services. We therefore
formulate the following proposition as regards digitized entertainment services:

568 P3b. In the absence of institutional restrictions, digitized entertainment services

are associated with a fast pace of internationalization and with export as the
default foreign operation mode.

Internationalization of logistics services tends to generate scope economies, but it is

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the value proposition driver, and not the capacity or capability drivers that matters the
most. The additional value to the customers of providing worldwide rather than local
logistical services is quite significant. Logistics services are characterized by general
purpose technology (Williamson, 1985) rather than firm-specific technology. Hence,
from a transaction cost perspective there is no strong need for the use of investment
modes when expanding into other countries (Anderson and Gatignon, 1986).
Furthermore, with low firm-specificity there is little need of imposing own brands
or technologies on foreign partners through binding licensing or franchising.
The strategic alliance therefore stands out as an obvious foreign operation mode for
logistics services. Moreover, strategic alliance formation also allows for a swift
internationalization without heavy capital requirements. From this we conjecture:

P4. In the absence of institutional restrictions, logistics services are associated

with fast pace of internationalization and with strategic alliances as the
default operation mode.
For network access services, worldwide connectivity and associated network externalities
are very strong internationalization drivers. Due to first mover advantages in terms of
network externalities, fast internationalization of network access services is imperative.
While the general potential advantages and disadvantages related to first-mover vs
late-mover strategies are well-known (Lieberman and Montgomery, 1988), the pursuit
of first-mover strategies for network access services is essential, as it paves the way for
achieving scale advantages through network externalities. Firms, such as Google and
Facebook, illustrate the importance of first-mover advantages combined with the scale
advantages of network externalities. Essentially, the core of Facebook’s services is no
different than the classic telephony and postal services, as noted by Thompson (1967, p. 16):
“The telephone utility links those who would call with those would be called”. In an updated
version we may here replace “telephone utility” with “Facebook”. In this regard, Thompson
(1967) early on pointed out that the necessary ingredients to operate as a network access
service firm (by means of what Thompson described as “mediating technology”) are that
the firm’s operations are executed in a standardized way and extensively, with multiple
clients/users distributed in time and space. In other words, if the network access firm fails in
its quest to build and extend the network, it will lose to competitors more capable of doing
so. For example, there were other internet search engines before Google, but they became
inferior in the market due to the strength of Google’s search algorithm, which was the
platform for attracting a vast number of users to Google.
A study by Mahnke and Venzin (2003) of the internationalization process
of eBay, shows how a series of acquisitions in Germany, France, UK, Australia, Korea,
 New Zealand, and other countries outside the US home market led to eBay’s Value creation
dominant international position in the person-to-person online auctioneering market.
The acquisitions were done over a relatively short period in the early 2000s (Mahnke
logics
and Venzin, 2003). This underscores the importance of swift action in order to build
a dominant market position and exploit first mover advantages. We therefore propose
that acquisition of foreign network firms is the mode of fast expansion. Hence:
569
P5. In the absence of institutional restrictions, network access services are
associated with a fast pace of internationalization and with acquisition FDI as
their default foreign operation mode.
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Table III summarizes our five propositions. The third column summarizes the
propositions about pace of internationalization, whereas the last column sums up the
propositions about default foreign operation modes.

5. Conclusions and further research avenues

In this paper we have argued that the use of value creation logics can be a useful
complement to the conventional approaches to the study of service firms’
internationalization. Clearly, the concept of value creation logics has both its
strength and weaknesses as an analytical tool for predicting and prescribing service
firms’ behavior in general and their internationalization in particular.
One strength is that the concept consolidates insights from marketing and strategy by
combining the customer perspective of the former with the resource-based view of the
latter. As another strength value creation logics are, intrinsically, universal: they apply
independently of technological and institutional changes across time. We submit that this
universal and time-less nature of value creation logics speaks in favor of its applicability
in corporate strategy and business model innovation, though, with some caution.
The merits of value creation logics untold, the value of the concept inevitably hinges
on its ability to produce robust empirical predictions of service firms’ behavior,
including their internationalization. The fact that firms in general encompass more
than one value creation logic complicates the use of firm databases and industry
statistics. Hence, for the analysis of a firm’s internationalization the relevant level of
analysis has to do with the services associated with one specific value creation logic.

Institutional barriers to Pace of (unrestricted) Default mode(s) of

Value creation logic internationalization internationalization foreign operation

Production of goods Tariffs, quotas, local Industry-specific Export, licensing, FDI,

content requirements JV, contract
manufacturing
Analytics services Local ownership Slow Greenfield FDI
requirements
Facility services Local ownership Slow to moderate Franchising
requirements
Entertainment Concessions, censorship Slow/fast Project export, licensing/ Table III.
export of digitized Pace of
services internationalization
Logistics services Concessions Moderate to fast Strategic alliance and default mode of
Network access Concessions Fast Acquisition FDI foreign operation
 IMR As an example, most banks are offering both network and analytics services – representing
two very different value creation logics. Whereas the advantages of internationalization,
31,6 due to network externalities and scope economies, are evident for the network services
the advantages are more modest as regards analytics (consulting) services. Furthermore,
the default operation mode for network access services is acquisition FDI, but greenfield
FDI for analytics services. In other words, it would be difficult to predict (or prescribe)
570 the internationalization patterns of banks only having access to aggregated firm data.
The need for in-depth analysis on a disaggregated level of value creation logics speaks in
favor of specially designed surveys and company case studies.
If firm data can be made available on disaggregated levels of analysis there are
indeed promising avenues for further research. In this paper we have focussed on
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internationalization aspects of service firms, but value creation logics hold the potential
of explaining several other behavioral aspects of service firms, including corporate
governance, protection strategies, and growth trajectories. Furthermore, and as
mentioned earlier, value creation logics may also assist managers in defining,
adjusting, or transcending their business models.

Notes
1. There are several other approaches to the general studies of service firms, such as
distinctions between knowledge-intensive and capital-intensive services (see, e.g. Contractor
et al., 2003), requirement of interpersonal and non-interpersonal interactions (Driver and
Johnston, 2001), extent of space manifestations of output (Berthon et al., 1999), or more or less
information-intensive services (Ball et al., 2008). For an overview of various distinctions of
services and service firms, see Carneiro et al. (2008).
2. The European Union’s directive on services in the internal market within EU is an interesting
example of how the institutional barriers influence the internationalization, or rather lack
thereof, of services. The former EU Commissioner for Europe’s internal market, Frits
Bolkenstein, originally suggested a wide-ranging liberalization of EU’s internal market for
trade in services. However, the proposed Directive provoked significant political opposition,
and was considered by center-left politicians and trade unions as a threat to national labor
laws. As a result, a modified version was eventually adopted, and as a consequence many
institutional barriers to trade and internationalization of services remain within the EU
(Economist, 2005).
3. It is beyond the scope of our study to account for the numerous features of a service offering
that compel customers to actually buy it. A competitive price, reliability, and sustainability
are examples of features that, across the different value creation logics, make a value
proposition attractive to customers. In this study we only look at the very basic service
offering and the reader has to consult the strategy and services marketing literature for more
in-depth accounts for the many different features that may make up a value proposition; for
good accounts, see, e.g., Barnes et al. (2009) or Kaplan and Norton (2004).
4. Hence, in this paper value creation is defined on the customer level and we delimit ourselves
from applying macro-level, societal perspectives. The literature on business ethics,
sustainability, environmental economics, and macro-marketing has in common the use of
societal perspectives on value creation.
5. Likewise services, goods production could presumably be divided into distinctively different
value creation logics; but since our focus is on service firms, we have just lumped
goods production into one, very general value proposition and some broad capabilities
and capacities.
6. With containment of people we are referring to penitentiary “services”.
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About the authors

Dr Peter D. Ørberg Jensen (born 1964) is an Associate Professor of Strategy and International
Management in the Department of Strategic Management and Globalization, Copenhagen Business
School and current Academic Director of CEMS Master in International Management at the CBS.
His research interests overall concern economic globalization and firm internationalization.
His research specializes on the global sourcing of advanced and high-value services and technical
functions, and the managerial, organizational and contractual aspects related to the sourcing
arrangements between firms from advanced, high-cost economies and firms from emerging
economies. Peter’s career track record includes 11 years in business consulting in the Danish firm
Ramboll Management, and a three-year assignment at the United Nations Development Programme.
His research is published in a range of journals in the field of management, marketing, economic
geography, and international business. He serves as a Member of the Editorial Review Board of
Management and Organization Review (Wiley), and Journal of Asia Business Studies (Emerald).
Dr Peter D. Ørberg Jensen is the corresponding author and can be contacted at: poe.smg@cbs.dk
Bent Petersen (born 1954) is a Professor in International Business and the former Head of
Department of Strategic Management and Globalization (2010-2011), the Director of CBS’ PhD
School in Economics and Management (2008-2010), and the Manager of CBS’ HD study program
in International Business (1996-2000). He is a Visiting Professor at the School of Business,
Economics and Law, University of Gothenburg, Sweden, and was a Visiting Scholar at HEC,
France (1993), University of Queensland, Australia (2000) and a Visiting Professor at the
University of Southern Denmark (2012). For five years (1984-1989) he worked as an Economist at
the Carlsberg Research Center, Department of Biotechnology and Business Diversification.
He has consulted with several multinational corporations, including the Volvo Car Corporation,
Carlsberg International and Novo Nordisk. He is a Member of the Academy of International
Business, the European International Business Academy, and the Strategic Management Society.
He has taught on Bachelor and Master’s level in Norway, Sweden, Finland, Austria, Vietnam, and
Australia. He has published over 40 refereed articles and four books.

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