Cultural Distance In Internationalization Process

Published Date: 02 Nov 2017

THE ROLE OF CULTURAL DISTANCE IN INTERNATIONALIZATION PROCESS

THE CASE OF STARWOOD HOTELS WORLDWIDE INC.

Keywords: Georgia, Poland, Ukraine, cultural distance, Azerbaijan, Sheraton, Starwood, Internationalization, entry modes.

ABSTRACT

The aim of the following dissertation is to examine and understand the role of the cultural distance in internalization process for the multinational companies and analyze and distinguish the ways that the managers of such companies respond to such challenges. Researcher tried to identify these challenges on an example of the company operating in Hospitality business, one of the world’s leading hotel and leisure chain companies Starwood Hotels & Resorts Worldwide, Inc.

The dissertation provides research objective related material, basic theories and reviews of the literature in the chapter of literature review. This section aims to create an informational pool for a reader to be able to recognize the problems and questions addressed by the research. This material supports better understanding of globalization, culture and its element, internationalization, modes for entering the market, etc..

Literature review section is followed by research methodology description. The author of the dissertation identifies several methods for carrying out the research and explains why the in-depth interview method was chosen for the purposes of this particular research.

Based on the material presented in the literature review and the interviews conducted with three managers of Starwood Hotels from four different countries (Poland, Georgia, Ukraine and Azerbaijan), researcher finds the necessity of synthesis of thinking global and acting local. Analyses part discuses how cultural changes affect behavior and strategies of Starwood Hotels, distinguishes preferred entry mode for the corporation of being the first on a market with full control, and explains the cohabitation of the global guidelines and local strategies.

THE ROLE OF CULTURAL DISTANCE IN INTERNATIONALIZATION PROCESS

THE CASE OF STARWOOD HOTELS WORLDWIDE INC.

by

LEVAN MUSKHELISHVILI

11029867

2013

Dissertation submitted to the Bradford University School of Management in partial fulfillment of the requirements for the degree of MSc in International Business and Strategic Management

PREFACE

Genesis of dissertation

As the preface to my dissertation, I would like to highlight a story that gave me the motivation for working on this dissertation and was crucial in determining its topic.

On one ordinary freezing winter day in Warsaw my mother called me and told that she had won a trip for two to the Seychelles from Starwood as a bonus for exceptional performance. She is a Complex Director of Sales & Marketing for Georgia/Azerbaijan for Sheraton hotels. She asked me to accompany her, of course I agreed without thinking.

There were up to 25 couples, all Starwood EAME divisional Sales Incentive trip winners.

On the 4th day of our retreat while playing some entertaining quest, like finding things in jungle divided in two teams, I noticed an amazing thing: people from different parts of the world had something strong in common, they were the trained team, they had some Synergy which was uniting and transforming them into one whole! I believe that none of random sampled managers can make such an organized team even in digging the dirt under old palms.

Do you know what makes group of Starwood top management from Dubai, Georgia, Germany and UK more efficient and united than randomly chosen managers? If you think it's a common goal that is only part of the answer.

So I decided to examine and learn more about Starwood Hotels management style on Multinational level.

Educational background of general management theories and strategic management is desired for better understanding of the following dissertation, but as all the general material necessary is included in the work, it is not inevitable.

TABLE OF CONTENTS

CHAPTER 1 : Introduction

Organizational vision and its implementation approach needs couple of years to change the person, change not only the work habit, but the lifestyle. These changes can be observed out of the working hours, in family or with friends even in games; Moreover the managers itself are more influential to organizational "soul" than non-managerial workers. Seeing this social organizational phenomena in reality, witnessing the exiting union of trained managers, I understood that I wanted to write about Starwood, and to reach a VRIO with this dissertation.

1.1 Valuable. Rare. (hard to) Imitate. Organized.

Generally VRIO model serve for evaluation of a firm’s resources and capabilities, and not for dissertations but I use this framework to highlight some important aspects of this particular research. As we are taught in "entrepreneurship of small and large businesses", an entrepreneur should fill the gap in industry of needs, In other words one should find something that is needed and he/she can provide. According to Timmons Model of Entrepreneurship (2004), we need opportunity, team, and resources for a successful business start up. In case of a dissertation, one can use the same model by only substituting "team" with "plan". I had great recourses: my mother and her colleagues who did not mind sharing their work experience with me, as well as the opportunity to work in a real world environment, and all that was needed was a plan.

Some MSc students for writing dissertation use quantitative researches which are held by distributing questionnaires of carefully prepared questions online, surveying some of their friends, colleagues, relatives. About specific topic, that might be really distant issue for that particular group of people, For example when someone writes about appeal industry during past ten years in Uganda, and asks me to fill his/her questionnaire online, I think I am an error of his/her research. There are several reasons which cause this. First it's hard to check validity and truthfulness of sample for reviewer; also this pre-survey process of selecting the sample group of appropriate people needs a lot of recourses, time, money); often as a result we get opinions of completely irrelevant group of people; Also you are not flexible in questionnaires; when you personally interview your respondent, some questions around the topic might come at that very moment , arousing from the answers.

That's why I chose In depth interviews with three different CEOs who are responsible for Sheratons in four different countries. Moreover this method gives other reader opportunity to check validity and accuracy of research, as Contact details of the interviewees is included in appendices.

1.2 How does Starwood do it?

The main question after coming back to Warsaw was: do the MNEs like Starwood follow a standardized strategy in every country, or are they in permanent transition?

What role do the cultural differences play in that process and how do managers deal with them?

The goal of this dissertation is to shed light on some little part of this huge field that has not yet been properly studied and reported on.

CHAPTER 2: Literature Review

In-depth vision and examination of the basic material available regarding the subject is crucial for logical and analytical thinking towards the problem. This section aims to present research relevant material and concepts, in order to be able to better understand the questions we seek to answer and problems addressed by the research. This material should give the researcher the informational base for leading the evidence analysis step by step and concluding the answers and assumptions.

To find out what type of material is more relevant for our particular case, we should think consecutively of subjects that are underlying the questions addressed by the research, segregate them separately and try to create the general conceptual vision of each of the fundamentals.

Despite of defining two main disciplines: Internationalization process and cultural distance my research questions also require understanding of such important topics like Globalization, Global and local approaches, hospitality business… So we should try to create informational pool for each of this subject separately in this section.

Initially will begin form illuminating "background" and borders of our study and then will go deeper to more specific and precise literature related to empirical part.

Globalization – what does this process mean; how do multinational companies support the globalization process and how does this process affect multinational companies. Which is the causing factor.

Cultural distance – conceptual meaning of culture, aspects of culture, how cultural distance affects and by global companies.

Hospitality Business – what does the hospitality business imply, what are the challenges of it; Role of domestic and host country culture on Hospitality Business.

Internationalization – What does the word Internationalization imply? Why going global? What does the critics and authors say about the motives of the companies going global; what are the stages suggested by different theorists, that companies go through before they become multinational.

Entry Modes – what modes exist for entering the market, what stimulates the different modes for entry, how the culture affects the choice for this mode.

Global Approach – global approach in management, benefits and negative reflections of Global approach.

Local Approach – local approach in management, benefits and negative reflections of local approach.

This section will examine each of the topics above to extract the information and ideas in the literature available.

2. 1 Globalization

The world is becoming one huge market for multinational companies as more and more companies are expanding their operational zone. This is part of the globalization process.

"Globalization refers to the growing economic inter-dependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology. " - (Meeting the Challenges of Globalization, 1997 p43).

According to the International Forum on Globalization, it is the present worldwide drive toward a globalized economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments.

There is no single cause, or particular event that started the globalization process. Nor there is a particular date which could be assumed as starting date. According to the BBC Globalizations Index article, the main causes of globalization are:

Improvements in transportation – As there is a possibility of traveling more quickly, world became faster in terms of transportation. Larger cargo ships increases transportation capacity, which reduces costs of transportation per item transported. Therefore, people are enjoying the benefit of economies of scale.

Freedom of trade – Barriers are removed between countries, as free trade between countries is promoted by various global organizations World Trade Organization (WTO).

Improvements of communications – people across the globe are able to have greater and faster communication between each other as a result of developing internet and mobile technology.

Labor availability and skills – Some countries have cheaper labor force available ; For example in India labor force is three times cheaper in comparison with the same cost in UK. Some distinct skill workforce may also be available across the borders. Many industries where labor is the main cost can take advantage of the cheaper labor force available in foreign countries. Example for such an industry could be clothing.

Globalization is surely having its dramatic effect on society. Opinions regarding its positive and negative effects vary in people. Some of them recognize only downturns of this process, some of them see opportunities in it. According to same source (the BBC Globalizations Index article )some of the positive impacts include

Inward investment by multinational corporations, which provides new jobs for a country, widens the range of skills available for people living in the country. Multinational corporations often buy local resources, products and services. By this means wealth and foreign currency are bought to local economies Such activity creates extra money that is spent in various areas in a country like The education, health and infrastructure.

Cross boarder trading also increases the awareness for the culture, lifestyle, ideas and experiences of the people from different countries. People are able to experience the elements of cultures, habits and foods of other people, which was previously not available in their home country.

"Globalizations increases awareness of events in far-away parts of the world. For example, the UK was quickly made aware of the 2004 tsunami tidal wave and sent help rapidly in response. Globalization may help to make people more aware of global issues such as deforestation and global warming - and alert them to the need for sustainable development" (the BBC Globalizations Index 2010, p..)

As for the negative influences of Globalization, Anti-globalization campaigners sometimes try to draw people's attention to the fact that Globalizations operates mostly in the interests of the richest countries, that use the benefit of increased access to means of production and resources available in less developed countries; this way rich countries continue to dominate world trade at the expense of developing countries.

Worlds cultural diversity is also considered to be most likely affected by globalization process. Local traditions, habits, languages could be faded away and become a mix of elements from different cultures which will re-cast the whole world An example could be a Hollywood film, which is far more likely to be successful worldwide than a movie made in India or China, which also have thriving film industries. (Source BBC United Kingdom article Geography/Globalization).

As a conclusion drawn from the definitions and ideas in this section, Globalization is caused by companies going global, but globalization process itself pushes the increasing number of companies towards becoming multinational, which means that both support each other.

2.2 CULTURE

As mentioned above, culture of different nations is threatened to be affected by globalization.

The word culture has been defined in some of the following ways:

" A set of values and beliefs, norms and customs, and rules and codes that socially defines a group of people, binds them to one another, and gives a sense of commonality" (Trenholm &Jensen, 2000. p.123) Another definition of culture would be:

"A system of shared beliefs, values, customs/rituals, behaviors and artifacts that the members of a society use to cope with their world and with one another, and that are transmitted from generation to generation through learning". (Hall, 2002 p.76)

The same author argues that Culture has its characteristics. it is Shared, Continuous, Transmitted, Learned, Social, accumulative, Integrated, varies from society to society, Responsive, gratifying, and linked with particular society. Culture is considered to be the heritage from folks, as it represents the reflection of particular people’s group’s beliefs, experiences and habits. it makes particular group of people unique and therefore needs to be protected from effects of globalization. As culture is continuous it is less likely to be affected immediately, but as it is responsive to influencing factors, in long-run it can adapt to that factor and therefore be changed artificially.

According to Zeihun Doda (2005. p.87 ) "Culture is stable when we consider what people hold valuable and are handing over to the next generation in order to maintain their norms and values. However, when culture comes into contact with other cultures, it can change. However, culture changes not only because of direct or indirect contact between cultures, but also through innovation and adaptation to new circumstances."

But in short-run perspective, culture is not flexible. Therefore, companies which operate in various cultures, have to deal with different cultures in ways that are sensitive to the particular aspects of that culture.

"Just as societies, tribes, religious communities, and neighborhoods all have cultures, so do the corporations. Shared values, behavior patterns, and communication styles all help the employees of a corporation, from the janitor to the CEO, both feel and express a common identity. Having a well-defined and explicit corporate culture not only increases efficiency, it also contributes to overall competitiveness" (Barney, 1986. p.19).

"When a formerly domestic corporation decides to globalize its operations, it needs to pay attention to globalizing its culture as well. A corporate culture that works well for employees in Atlanta may need to be at least partially redefined by the national culture of Indonesia, where it is now conducting some of its manufacturing." (M. Czinkota, I. Ronkainen, and M. Moffett, 2004. p.36 ).

Therefore companies do need to adjust their approach while expanding operations to a host country. But different companies may face difficulties caused by cultural difference at different degrees, depending on their business activities. As our focus company is engaged in hospitality business, we should take a glance at this industry in general.

2.2.1 CULTURAL DISTANCE

Hofstede’s Cultural Distance

Hofstede’s cultural value scores have been used to calculate aggregate cultural distances between countries along these four dimensions in order to quantify cultural differences between countries, (Kogut, 1988.p.234).

On the one hand, those cultural distance scores have been widely used in order to explain the different phenomena that often take place in international business, for example the entry mode choice, international diversification, and performance of multinational companies (Tihanyi, 2005. p.82).

This approach has also been heavily criticized. First, the calculation of distances based on Hofstede’s scores suggests that the distances are symmetric. In other words, a company that is from Swede, for example, and wants to invest in China is actually supposed to face exactly the same cultural distance as if a Chinese company was to be investing in Sweden, an assumption that has because of that received little support. Second, the concept of cultural distance assumes homogeneity within each nation, a criticism already talked about widely against Hofstede’s data collection. It becomes even more serious when the data are then used to calculate the distance scores between countries, taking into account neither different intra-cultural variations nor the actual physical distance between both locations. For instance, we would expect significant differences for a Spanish firm investing in France depending on whether the home and host units are located in Barcelona and Perpignan, respectively, or in Seville and Le Havre, respectively. This is particularly relevant for large and diverse countries like the BRIC (Brazil, Russia, India, and China) but it is also applicable to smaller countries: The computed cultural distance between the Czech Republic and Slovakia, two states that shared the same national flag for a long time, is higher than for most other cultural pairs!( Ghemawat & Reiche 2010) This not only highlights the role of intra-cultural variation but it also raises doubts over whether the country is necessarily a suitable proxy for defining cultural regions.

To show how various businessmen, companies, researchers or just individuals use certain gap in culture between different countries, or even in the same country (some sociologists divide for example Germany in different parts to highlight huge cultural difference within the country) hereunder is shown hierarchical cluster analysis, with complete linkage and scaling through only one dimension.

C:\Users\Musxela\Documents\thesis\pics\cultural distance.JPG

Source: Hamid Yeganeh, (2011 pp.325 - 346)

There have been many other researches looking at Hofstede’s original four dimensions (and their aggregation into a single measure of cultural distance). What they have done, is they produced results that do not actually fit as well with theory and intuition. One study (Ghemawat & Reiche) indicates that cultural distance actually increases bilateral trade, which its authors surmise may result from companies preferring to export to culturally different markets rather than invest to serve them via local production. It is important to mention here, that this actually contrasts heavily with the general view that cultural differences are an obstacle to trade. Much research has also been done connecting Hofstede’s cultural framework to foreign investment flows, and in particular to patterns of foreign market entry. A summary article reports that,

"Firms from countries with large power distance prefer subsidiary and equity JV entry modes whereas firms from countries high in uncertainty avoidance prefer contract agreements and export entry modes." (Kirkman 2006 p.18)

The same summary article also cited various studies analyzing the effects of cultural distance on entry modes, though there have already been some comments concerning the methodology about such studies:

"Findings demonstrated that as the cultural distance between countries increased, the tendency to choose a joint venture (JV) over an acquisition increased Also, as cultural distance increased, Japanese firms were more likely to choose green-fields or wholly owned subsidiaries over shared ownership; the tendency to choose licensing over JVs or wholly owned subsidiaries increased; the tendency to choose a Greenfield over an acquisition increased; wholly owned subsidiaries were less preferred than either shared-equity ventures or technology licensing; the tendency to choose management-service contracts over franchising increased…" (Kirkman 2006 p.18)

2.3 HOSPITALITY BUSINESS

According to Botherton Hospitality management handbook, in the study of hospitality in general, and hospitality management more specifically, definition of the term is problematic because of the lack of general agreement as to what hospitality ‘is’. According to the same source various definitions include those in dictionaries, thus hospitality is the

‘Friendly and generous reception and entertainment of guests or strangers’ (Oxford Quick Reference Dictionary, 1996, p.48)

Or ‘kindness in welcoming strangers or guests’ (Collins Concise English Dictionary Plus, 1989, p.84).

Variant terms, such as the word ‘hospitable’ is defined by The Oxford English Dictionary (1970, p.391) in very similar terms to ‘hospitality’ as

‘offering or affording welcome and entertainment to strangers".

Hospitality is ‘the method of production by which the needs of the proposed guest are satisfied to the utmost and that means a supply of goods and services in a quantity and quality desired by the guest and at a price that is acceptable to him/her so that he/she feels the product is worth the price’ (Tideman 1983, p.63).

Zeldin (1994 ) elaborates the domestic/public axis of hospitality from the perspective of cultural history,: The question that concerns the author is whether people find it more or less easy to speak to strangers than they did in the past times?

" The answer can be found in the history of hospitality. Today in the rich countries, hospitality means, above all entertaining friends or acquaintances in one’s home; but once upon a time it meant opening one’s house to total strangers, giving a meal to anyone who chose to come, allowing them to stay the night, indeed imploring them to stay, although one knew nothing about them. This kind of open hospitality has been admired and practiced in virtually every civilization that has existed, as though it fulfills a basic human need." Zeldin (1994, p.198)

Hence according to definitions it follows that any business from the service industry that engages in lodging, restaurants, event planning, theme parks, transportation, Cruise line is considered to be in the hospitality business.

Developed economies are known to be becoming more service oriented economies recently, with most production operations transferred to less developed economies. Therefore developed economies are more likely to export their services, including hospitality, abroad. As hospitality involves face-to-face interaction with customers, and business gets in direct touch with host country’s culture, understanding knowledge and awareness of cultures is crucial while planning, managing and operating the multinational business.

"Business success in the 21st century will be dependent on how individuals and organizations acquire and practice cross-cultural sensitivity and skills in dealing with customers from diverse background" (Harris 2004, p 556).

Various cultural aspects should be foreseen in hospitality business. Harris (2004, p.563) suggests the following classification:

Sense of self and space – What is the adequate spacing between individuals (closeness or distance), and what can validate individuals sense of self in a group of particular people. what validates one’s sense of self within a particular group? What constitutes adequate space between individuals such as distance or closeness?

Communication and language – what weight does the nonverbal communication as exchange, body language and gestures have, and verbal communication is also considered of verbal and non-verbal exchange, body language and gestures etc.

Dress and appearance – many group of people has its own distinctive outward garments, which can be related to dress requirements for various events or business or religious days etc.

Food and feeding habits – the habits like use of cutlery or chopsticks or hands. Type of food , the way it is presented; , diet or religious needs.

Time and time consciousness – sense of time can be exact or relative. this difference can be easily observed in European countries and in Arabic countries for example.

Relationship – how are individual or organizational relationships determined (What effects can have the age, gender, status, wealth, power on a relationships.)

Values and norms – what are the customs, and practices.

Beliefs and attitudes – what is the most common opinion for spirituality, faith etc.

Mental process and learning – thinking and learning style, the way that the information is organized and processed.

Work habits and practices – attitude to specific job, work in general and labor, what is the dominant type of work, rewards and promotions etc.

Taking into consideration all the country specific and cultural factors of the country that business is about to enter, managers of the company can chose the modes of entry for that particular country. What options do they have, will be discussed in the section of the modes of entry.

2.4 INTERATIONALIZATION

We all do have our own general interpretation of the term internationalization. So do the critics and different authors. They all describe one and the same topic according to their own vision and expertise. One of the oldest definition of the term is

"The Process of Increasing involvement in International Markets" (Welch and Luostarinen, 1988, p.25);

According to the most simple definition

"When firms cross-borders it is, by definition, internationalization" (Schweizer, Johansson, Vahlne, 2010, p.109)

To be on the same track I will consider these definitions for our further discussion.

So while going global, companies expand their operations from their home countries to other countries across the globe. But what drives them towards international expansion, what are the benefits of being multinational company, what are the motives of going global? There are bunch of real life examples in the modern world that gives the answer to these questions:

Broader market – entering the markets in foreign countries can substantially increase the number of customers for a company. When local market demand is already assimilated by the company, or saturated by competitor suppliers, going abroad is the best way towards sustained growth.

Cost Advantage – Due to different levels of living, social well being and discrepant distribution of wealth across the globe, levels of average salary can vary substantially according to Geographical location. As long as the labor costs are one of the largest-scale cost for companies in different sectors, moving operations to lower cost locations is a step towards cost efficiency.

"Economies need to export goods and services in order to generate revenue to finance imported goods and services which cannot be produced indigenously" (Coutts and Godley, 1992, p.72; McCombie and Thirlwall, 1992, p.146).

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Source: BBC United Kingdome

Access to means of production – Resources are scarce which means that humans have insufficient resources to fulfill all of their needs. Some of such resources are unequally distributed across the earth in terms of geographical location. When a host country has more of that scars resource necessary for company’s operations, than that country of origin, companies have benefit of access to such means of production if they cross the border.

There are different theories regarding the reasons of international trade (which itself implies why companies should become multinational) in an article by critics.

"International production theory suggests that the propensity of a firm to initiate foreign production will depend on the Specific attractions of its home country compared with resource implications and advantages of locating in another country. This theory makes it explicit that not only do resource differentials and the advantages of the firm play a part in determining overseas investment activities, but foreign government actions may significantly influence the piecemeal attractiveness and entry conditions for firms". (E. Morgan and S. Katsikeas, 1997, p.23)

The same critics present the three different cycles of stages suggested by different authors that companies go through when becoming multinational (table 1):

Untitled.png

Source: "Theories of international trade, foreign direct investment and firm internationalization"Robert E. Morgan and Constantine S. Katsikeas (1997, p.45)

2.5 SERVICE SECTOR

As I already noticed it is easy to find academic findings, claims researches and lot more info about internationalization process, But it gets really hard when you search something about service sector internationalization process and it was nearly impossible to find enough amount of usable info about hospitality industry in the same process. So hereunder is information from the article ( Pluta-Olearnik, M, 2011) where professor Olernik will shortly cover the topic about internationalization and franchising. We will also divide and group some of services and its characteristics with a help of the same article. I think this classifications will clarify some aspects of service and will be used as a tool to filter validity and quality of empirical part of further research.

If MNE wants to franchise service in a foreign market that means one is aware to obtain local subject to use their full marketing planning and implementation, have organizational solutions, standards of providing services by a foreign company, which often includes geographical exclusivity. This form can be applied to such sectors like hotels, fast food, car renting, and restaurants, famous multinational chain examples can be like Hilton, Sheraton, Holiday Inn; McDonalds, Pizza Hut; Hertz and Avis.

As E. Duliniec(2009) emphasizes, international franchising has been developed in service sectors because of increasing costs of other forms of market entry (costs of plots or renting a facility). He states that for final success It is important to establish trustful communication with local suppliers costumers and authorities knowing the local market and good cooperation with the staff

to notice that dynamic expansion of franchising chains is connected with customers’ lifestyle

changes, especially international mobility of customers of hotels, restaurants, shops and renting cars.

Talking about issues concerning internationalization of the service sector, it is important

to quote such a classification of services which lets us find susceptibility of particular groups

(kinds) to processes of their internationalization.

The most extensive among works in literature about marketing are systems of classifications drawn up by Ch. Lovelock (1983), five basic questions are answered in this classification:

1. What is the character has the act of providing a service ,

2. What type of relations and interactions are between a servicing company and its customers,

3. What is the degree of the possible staff independence and how individualized can the service be.

4. What specific character demand and supply of the particular services has,

5. In which way a service is provided.

We can build matrixes according to Lovelock’s systems of classifications containing different sets of services which are united under the sectors. Sectors can differ because of the nature of service (mainly based on the level of interaction with clients that service requires) and The way in which the service is delivered (the degree to which the service provision requires exploitation of tangible goods).

Vandermerwe and Chadwick present the example of such matrix designated by the degree of tangibility of a service (relative involvement of tangible goods in provision of services) and the degree of interaction between a consumer and a service provider. This is showed in Figure 1.

The degree of consumer/producer interaction is represented on the horizontal axis and the relative involvement of goods in a service is represented on the vertical axis.. For example:

– Services that are limited in international potential in their present form are united in sector 1 (e.g.domestic mail delivery),

– Services that are easy to export from the country of origin because they are almost fully embodied in goods are united in sector 3 (e.g. software or music services),

– Services that are almost intangible but they have high experience and credence

attributes, requiring personal interaction – relatively difficult to store and export are united in sector 4 (e.g.consulting, advertising, insurances),

– Services that require strong interaction with a physical goods and often take place through machines rather than people are in sector 6 (e.g. teleshopping, electronic mail). This sector is likely to become globally significant in the future.

Fig. 1. Service groups and their internationalizing approaches

Source:(Vandermerwe, Chadwick 1989), s. 84.

if we take into consideration the possible ways of internationalization, the set of distinguished sectors are changing determined by the range of investment, physical presence and the degree of control in a foreign country. According to this approach we can observe three main groups of services (Figure 1):

− Group 1 services that are susceptible to export, where investments, control and steady presence in foreign markets is minimized. Examples could be software, movies, music, journals.

− Group 2 services that are requiring some level of investment, control, and physical presence and the key organizational forms like: licensing, franchising, management agreements, joint venture . examples of this could be fast food, hotel, couriers, maintenance.

− Group 3 are the services where the main resource is staff and the foundation is interaction between personnel and customers . This requires more conventional strategies of internationalization of services

because, a bigger control of distribution process – direct investments, branches, subsidiaries, mergers and acquisitions are possible there. Examples for this category could be consulting, management, banking, insurance, education, advertising, medicine.

The degree of difficulty and costs of entering a market is determined by a way of providing a service According to this difficulties and costs variants of strategies are suggested: export, contract and participation agreements or direct foreign investments.

Ch. Lovelock (1983, p.16) states that "developing classification schemes is not enough. If they are to have managerial value, they must offer strategic insights. That is why it is important to develop ways of analyzing services that highlight the characteristics they have in common, and then to examine the implications for marketing management."

As (Carneiro, Rocha, Silva, 2008, p.10) conclude in their article: "The specific modifications required may not always be clear from the start. Therefore, a service firm may choose a higher-control entry mode, whereby it would be able to introduce the necessary adaptations in a "learn by doing" fashion. Once satisfied with the adapted service package, it may decide to license it to third parties. Therefore, in the case of high (perceived) psychic distance, an inverted (to the Uppsala model’s expectations) sequence of expansion might be observed, from higher to lower-control modes".

2.6 5 I'S OF SERVICES

There is one popular question about service thru internationalization: Can be services rally imported or/and exported? We will try review deeper analysis of word "internationalized services" by looking at article ( Pluta-Olearnik, M, 2011) to illuminate correct path to the answer.

" The characteristics of services determine the predominantly "local" structure of service

firms. Intangibility leads to service close buyer-supplier interactions. This will complicate the

internationalization process in services, but this physical distance can be bridged. In the context of

internationalization five basic characteristics of services should be described (5I’s)"

( Pluta-Olearnik, M, 2011, p.9)

1. Intangibility. quality and consistent delivery over time are crucial aspects when service firms primarily deliver intangibles and service. Institutionalization of the knowledge gained abroad is important for international service firm in terms of procedures, manuals, service processes, IT solutions. Service firms must pay attention to recruiting foreign staff, using local knowledge and developing relationships.

2. Inseparability. It refers to the simultaneous production and consumption of services.

This could have two main problems in terms of internationalization of services. customer accessibility to the service delivery system – service firms usually have to be in foreign countries because it is quite hard to export service. And secondly it could be the problem of difference in culture. In this context, two kinds of service firms should be distinguished: soft and hard services firm. Soft is when it is impossible to decouple production and consumption of services, (example could be hairdressing); Hard services firms are when it is possible to separate production and consumption, (in this case example could be software).

3. Inconsistency. The service creation process consists of three sets of recourses each of which can have an impact and affect differently the final service quality during and after this process. First are customer recourses and their style of participation the service encounter. Second are recourses for contact (service provider and their style of delivering the service). Third are physical recourses. Cultural differences should be considered by services firm intending in internationalizing. Approaches found to be effective in one market will not necessarily be effective in other market.

4. Inventory. The entry modes and the opportunities to internationalize for a service firm can be tremendously impacted by Technologies. It can be possible to avoid the necessity of the physical presence during the service encounter – a service firm does not have to have its complete offering on a particular site and it simplifies operations. Technologies does have an effect on all the 5 I’s.

5. Inability to own. In many cases, especially when perceived risk is high, inability to own may create a lot of insecurity about the service. Trust is the most important factor in creating bridges between the service provider and the customer and therefore trust makes the possibility to build marketing relationships.

2.7 Uppsala model for service internationalization

In my opinion this part of literature review is the most relevant and important academic observation for this dissertation, because here is not only definition and purpose of Uppsala model, but you can find various academic quotes and mainly information from article called "Challenging the Uppsala Internationalization Model: a Contingent Approach to the Internationalization of Services" (Carneiro, Rocha, Silva, 2008) which will illuminate as I said most relevant topic of the research: Internationalization process for service sector by quick reviewing its' different models, approaches, and entry modes. The same article also shows the descriptive and normative perspective of Uppsala model in intangible industry (service), (how it is actually used and how Should it be used), also we'll try to add some useful information to upper part (service characteristics) to extend our knowledge about variables affecting internationalization of services.

" The Uppsala Internationalization Model (Johanson & Vahlne, 1977, 1990) was initially developed based on case studies of Swedish manufacturers Johanson & Wiedersheim-Paul(1975) adopting a behavioral perspective (Andersen & Buvik, 2002);(Björkman & Forsgren(2000) inspired by the work of Penrose(1959),Cyert and March(1963), and Aharoni, (1966). The model asserts that a firm’s market knowledge would be the driving force of its internationalization path. "

(Carneiro, Rocha, Silva, 2008, pXX)

According to the theories presented in the article, psychic distance between home and host countries along with the firm’s accumulated experience on a particular market constitutes the specific market knowledge. According to this theory, model is suggested in the article.

"The model contends that: 1.firms choose new countries for expansion according to their psychic closeness to the host country, moving to more psychically distant countries only as they gain experiential knowledge from past international operations; and 2.resource commitments in each selected country increase in incremental steps as the firm gains experience in each market." (Carneiro, Rocha, Silva, 2008, pXX)

Here is the table showing the degree of which client is involved in particular service, Authors Lovelock and Yip divide nature of in two main characteristics tangibility and intangibility let's see what type of groups are assigned to each of them.

Source; Lovelock and Yip’s (1996, pXX) Services Typology

Possession-processing services. In this category services like are freight transport, warehousing, equipment installation and maintenance, car repair, facilities security, veterinary services, laundry services and disposal of industrial waste are included. These services involve tangible actions that increase the value of the

object. Depending on the specific service, the factory could be fixed to one site or mobile. When the service must be rendered in a specific location a number of times, factory could be fixed; and factory could be mobile when technology allows the service to be rendered at a distance. The objects subject of such services must be physically involved, but the client need not be.

,

. People-processing services. For rendering such services clients must be physically or mentally present as rendering such services involve tangible actions to clients. Clients become part of the production process, which is simultaneous to the consumption. Examples for such services could be passenger transportation, medical assistance, restaurants, hotels, and museums. The client has to visit the location where the service is rendered (a plane, a hospital or a restaurant, for example), or the service provider has to visit the client (medical assistance). In both cases, the service provider needs to maintain physical facilities near the location of interaction with

the client.

. Information-based services. This type of services involve the collection, treatment, interpretation and

transmission of information, such as accounting, banking and insurance, training, legal assistance,

news production and broadcasting, and marketing research. Mostly electronic channels can be used for communication and delivering the service is used as the physical involvement of the client is usually low. Therefore distance is not a problem in this case. Physical presence can be limited to contact equipment and telecommunications infrastructure, permitting remote access.

Therefore Carneiro, Rocha, Silva(2008) state that As for the relevance of psychic distance, some services may not be affected in the same way as others. Some (though not all) less tangible services may be more prone to a client-following pattern (e.g., consulting, advisory or auditing services); in some object-based (e.g., fast-food) as well as in some people-processing services (e.g., hotels chains) clients may value standardization across countries; standardized services with little influence by contact personnel are more immune to cultural differences since they are less dependent on personal interaction. All these examples make it clear that psychic distance may not universally and homogenously affect all types of services.

In Sheraton's case, people-processing services have high client involvement and are very culture sensitive, which provides a better strategic and customized fit than a standardized scheme

Let's see what kind of strategic entrance flexibility level will our research show.

2.8 ENTRY MODES

According to Root (1998), an entry method can be defined as ‘the institutional arrangement for organizing and conducting international business transactions’

According to Driscoll and Paliwoda (1997), there are three primary aspects influencing a firm in its entry mode strategy:

dimensions of mode choice, i.e. levels of control, dissemination risk, resource commitment, and flexibility that each mode possesses;

situational factors such as country risk, socio-cultural distance, government regulations and policies;

rapid globalization, economic liberalization, accelerating rates of technological change, and the transition of centrally planned economies into more market-based systems have focused attention on international markets.

According to Gorynia (2007) the different modes of entry vary in term of the capital risk level, the company’s resources and the level of control on the operations within the foreign country.

In The Services Industry Journal, Maureen Brookes and Angela Roper discuss impact of entry modes on the organisational design of international hotel chains, where they state that there are a wide range of international market entry modes commonly employed by service firms. Which entry mode is most suitable for specific locations has been the subject of numerous empirical investigations that have adopted a range of different theoretical perspectives. Despite the diversity of explanations to support modal choice decisions, there is general consensus that these decisions have an impact on a firm’s performance and survival (Ekeledo & Sivakumar, 2004). As control is frequently considered the single most important determinant of risk and return in entry mode decisions (Blomstermo, Deo Sharma, & Sallis, 2006), the degree or type of control afforded by different market entry modes is a key consideration within international expansion strategies.

Treadgold (1988) suggested that there are three types of entry strategy for corporations in international markets. The first is the entry strategy that affords a high degree of control. The second is a medium degree of cost and control and, finally, there is the low cost of control strategy.

Rugman et al. (1985) have identified eight modes of entry strategy that a firm may select from: export/import, joint venture, licensing, franchising, wholly owned subsidiary, turnkey contract, management contract, and contract manufacturing.

Choosing one of the above mentioned modes of entry, is dependent on various other factors like company’s strategy as a whole, investment objectives, risk tolerance level, host country related risks etc.

Another significant decision has to be made by multinational companies when it comes to implementing operations across the border: dilemma of local vs global strategy.

2.8.1 Entry modes for Hotels

This section will focus on choosing entry modes for MNE hotels. The information below is taken from article "Entry mode choice in the internationalization of the hotel industry" (Garcı´a & Barber, 2010)

Generally speaking, the different options can be grouped according to the degree of control involved, and capital contribution required. So three main sets are distinguished:

The entry modes that entail direct investment with a degree of total control, examples are acquisitions and green field investments.

The entry modes that involve direct investment of capital but the control is shared

The entry modes that do not involve capital contribution at all; examples are management contracts

and franchising.

Management contracts are quite frequent in hospitality business.

" In management contracts, chains are responsible for all hotel operations. The chain implements systems and procedures, selects the hotel manager and imposes their policies on human resources and quality. In short, the hotel is managed as if it were owned by the chain. The only aspect of control that varies in relation to joint ventures is that exerted over the physical assets. In this case, the owner of the hotel can make decisions without involving the hotel chain participation."

(Buckley, 1995, pXX).

The franchise agreements are also frequently used technique in hospitality business, when the chain gives their brand name to the owner of the hotel. This agreement normally includes the sales, marketing and quality control system of the chain. In this case, the hotel owner has a right to control the daily operations of the hotel and manage physical assets while the chain do not have a right to manage the hotel. According to the article "The chain only retains control over the codified assets, while the tacit control over assets is shared with the hotel."

Table 1. Entry modes and control.

Source: Contractor and Kundu (1998, pXX ).

Note: a, Daily management and quality control; b, control over physical assets; c, control over organizational routines and tacit elements of the firm; d, control over codified strategic assets.

in the same article by (Garcı´a & Barber, 2010) authors research slightly touches the role of cultural distance in choosing entry modes. Authors name the cultural distance as major source of uncertainty. The use of modes involving smaller resource commitments are found to be supported by the perceptions of a big cultural distance between the country of origin and host country.

" In general, information–acquisition costs and, therefore, integration costs can be expected to increase with the increasing cultural distance"

(Gatignon & Anderson, 1988; Kogut & Singh,1988, pXX).

In such cases, firms often show a tendency to use agreements with local firms to overcome the liability of foreignness. However,

"the transferability of a service depends on the cultural distance between the country of origin and the target country as well as on the cultural attributes of the service itself" (Sa´nchez et al., 2007, pXX).

"As cultural distance increases, there is a danger that the transfer of this knowledge to local partners may be imperfect since local institutions, norms and routines differ"

(Fladmoe-Lindquist & Jacque, 1995; Madhok, 1997, pXX).

Aspects like management systems and training methods can stipulate the efficient service delivery, such as management systems, training methods, etc.

"In particular, the provision of hotel services requires substantial investments in human resources, since such services depend on the skills, talent and knowledge necessary to satisfy the needs and expectations of the consumers"

(Domke-Damonte, 2000, pXX).

According to the article of Garcı´a & Barber (2010,pXX "In such circumstances, even though local adaptations may be required, hotel firms would need to incur considerable investments, for instance, in the transfer of management systems and in training, to train local employees in the firm’s know-how and to ensure that the quality of the service provided is not compromised. Such high levels of resource commitments would make it more likely that equity ownership is maintained over the transfer. "

Hereunder Cristina Villar-Garcı´a and Jose´ Pla-Barber (2010) formulate hypothesis:

H1: In the hotel industry, the greater the cultural distance, the greater the likelihood of hotel

chains choosing full control modes.

It appears that for the hotel industry pattern of behavior of this hypothesis is quite different from the manufacturing industry; And the hypothesis is confirmed for the hotel industry. According to the article researches observed that the higher cultural distance increases their preference for strict methods of control , as it is more difficult to transfer their know-how to local firms employing very different business practices. As a conclusion of the article, as hotel services depend on the skills of the workers and special management systems

and processes transfer of those assets to local partners becomes a hard task when the cultural distance is very high.

After analyzing my primary and secondary data my research will try to respond to this hypothesis.

2.9 GLOBAL APPROACH VS LOCAL APPROACH

A company expanding across borders can either take its home country strategy abroad (form it as its global strategy for operations), or adopt a new strategy for host country operations (develop and implement multi-domestic strategy).

Each approach may bring its benefits as well as do the harm for multinational companies. Global approach is a mean of economies of scale, is an opportunity of the extended product lifecycle; but at the same time it can cause failure to recognize local needs, failure to respond to market signals and may lead to failure of the business as a whole. Therefore, local insight is apriority.

Global companies must be more than bunch of overseas subsidiaries with executive decisions made at headquarters. Instead, a new type of company is evolving. It does research wherever necessary, develops products in several countries and promotes key executives regardless of nationality."

(The Stateless Corporation, Business Week May 14, 1990)

But too much concentration on local markets separately means dispersed control in a company structure; decentralized control makes it harder for a company to operate as a single organism, less standardization leads to increased costs.

Then what is the decision, what is the degree of local responsiveness and global control that companies should implement in order to avoid the possible injurious outcomes of the two different approaches?

"International companies face two major challenges: whether to adopt global strategies, which emphasize product standardization and globally functioning infrastructure (customer service, supply chain preference , communication), or to adopt to local market requirements"

(Daniels, et al, 2009, pXX).

"Drawing from the comparative international business management theory, considerable scholarship of has debated the MNEs communication effectiveness in terms of the global integration and local responsiveness paradigm "

(Ovaitt, 1988, pXX).

Which is a better trend - to be totally "stateless" and be the global company, or act as a national company with global elements?

One of the prominent academics Sumantra Ghoshal (1948-2004) in the field of management, specifically focused his work on the strategic management discipline and international business. During his academic career, Ghoshal looked into a variety of issues related to the strategies that companies use for implementing their foreign operations, with the primary concerns of finding the most practical ways of how multinational corporations should organize internally the relations among subsidiaries and between the subsidiaries and the headquarters.

"Increasing global competition has made it critical that multinational companies (MNEs) be both globally integrated and locally responsive at the same time"

(Bartlett & Ghoshal, 1988, 1992. , pXX)

For the MNEs, in is the biggest challenge to establish a system that will effectively accommodate the two conflicting needs of globalization and localization. The question doesn’t aim two answer which one is better, centralized or decentralized organization or decision-making structure. Nor is it to decide if and what functions should be globalized or localized. Rather,

"it involves creating a system that will simultaneously be centralized enough for global integration and decentralized enough for local responsiveness"

(Bartlett & Ghoshal, 1989, pXX) .

"As an alternative to balancing the tradeoff between global strategy and multi-domestic strategy, many MNEs have employed a so-called transnational strategy" (Barlett & Ghoshal, 1988, pXX).

According to Ghoshal, as a result of this challenge companies have became capable and adopted such organizational capability that allows them to be very sensitive and responsive to differences in national environments around the world. In effect, these corporations manage a portfolio of multiple national entities; and these companies are called multinational companies (C. Bartlett and S. Ghoshal "Managing across borders").

Here we had general insights of two different approaches for MNEs to enter foreign markets; but let's see General advices for global integration what should successful multinational do abroad?

2.10 GENERAL ADVICES FOR GOING GLOBAL

An article called "Global integration of learning evolves" by Jeff Lucas and Ray Rivera presents a survey conducted by Professional Services of more than 80 international businesses. This research presents a good opportunity to evaluate Sheraton's innovative skills in integration plus examine some of the controversies, if any.

"Global integration is a highly complex activity fraught with cultural, political, financial, and technological considerations. Consequently, the recommendations that follow are founded on the principle that integration is best approached incrementally—element by element— rather than in one fell swoop, analyze the current state of the learning function."( Jeff Lucas, Ray Rivera, XXXX)

According to the article, businesses should assess their learning function to identify and identify the elements that are gained from home country and elements that are later acquired; They should distinguish which elements of the function are local, regional, or global. MNEs should also analyze and understand why certain elements are more integrated than others. As suggested by the article,

" A global learning personnel census, which highlights the staff’s capabilities and linguistic skills, should be included in the assessment. Decide which elements of the learning function should be integrated." ( Jeff Lucas, Ray Rivera, XXXX)

The authors of the article state several factors that organizations should take into consideration while developing a business case for integration:

• Learning experience - the impact of it on integration on business performance and its quality

• Cost side - the costs associated with integration

• the ease of implementation - For each business location function of learning experience should be analysed based on assessing the following parameters:

• number of employees

• employee literacy rate

• employee performance and learning needs

• staff’s linguistic and technological skills

• functions performed at the location

• location’s technological infrastructure

• workers, if any, who are responsible for carrying out the learning function at the location.

According to the article, "The odds of defeating organizational resistance increase when the initiative is appreciated and treated as a complex change event. Therefore, an executive sponsor should visibly champion the initiative and overcome pockets of resistance." ( Jeff Lucas, Ray Rivera, XXXX))

This is why author suggests clearly cut functions of a program manager, who should be as- signed to set objectives and develop program plans and milestones, and a governance structure should pro- vide guidance and receive reports on progress and roadblocks.

Failure mode analysis is also suggested as alternative, which involves identifying the potential roadblocks to success and developing mitigating activities to address them.

"Learning activities do not occur in a vacuum—especially on a global scale. So the more engaged that pertinent functions such as corporate communications and information technology are, the more likely the initiative will succeed." – the author says. ( Jeff Lucas, Ray Rivera, XXXX)

Conducting Organizational network analysis should also be a useful act as suggested by the article, as this process highlight the best connected employees who can be tapped to lead or support integration efforts because they understand how to find resources to ensure successful implementation, and they have the reputation to influence an initiative’s successful outcome.

In service companies, some providers, such as consultants, are good at developing plans for global integration, while others are better skilled at helping in implementation of the plan for a businesses, or both. Businesses should understand their involvement in previous integration initiatives with clients and contact their references to evaluate providers; so local stakeholders must be reached out. Regional and local leaders could have the global initiatives that could be beneficial for the learning leaders residing at a business’s global headquarters

" Global stakeholders should be included early and throughout the process, rather than only at the review time. Establish a global learning governance board. A learning governanc