An executive summary for managers and executive readers can be found at the end of this article

How e-commerce is transforming and internationalizing service industries

Cliff Wymbs
Assistant Professor, Baruch College, The City University of New York, USA Keywords Services marketing, Electronic commerce, Internet, International business, Service industries, Globalization Abstract Services account for over 50 percent ($3.6 trillion) of the 1997 gross domestic product for the USA, and more than 25 percent of world trade. However, information technology and the Internet are causing fundamental changes in the economics of service industries as new, network-based, global e-commerce business models emerge and begin to dominate. This analysis attempts to isolate the key factors driving the competitive transformation and globalization of the services industries. Highlights how the Internet is changing the level of information asymmetry between the buyer and seller and how this in turn is altering industry profitability.

One of the most significant developments of the 1990s in the globalizing economy is the identification of the service industries as the fastest increasing component of multinational enterprise (MNE) activity in both developing and developed countries (Dunning, 1993). Services account for over 50 percent ($3.6 trillion) of the 1997 gross domestic product for the USA and more than 25 percent of world trade (Winsted and Patterson, 1998). Almost the opposite of manufacturing industries, services are commonly regarded as being intangible, perishable, heterogeneous and usually requiring their consumption at the same time and in the same place as their production (Pitt et al., 1999). More specifically, a service depends to some extent on the interaction between the buyer and seller for its provisions (Grosse, 1996). The services sectors are very diverse and range from knowledge and information intensive areas, performed in both public and private sector organizations, to very basic services such as cleaning and maintenance. It also includes retail, wholesale, construction, transportation, communication, professional, insurance, tourist, educational, and health care (Dicken, 1998). According to UNCTC (1988) 85 percent of all international investment in services were in two groups, trade related (Johanson and Vahle, 1977) and banking and finance (Gray, 1990; Gray and Gray, 1981). Services provide linkages Services not only provide linkages among the segments of production within a value chain and linkages of overlapping value chains, but they also bind together the spheres of production and circulation (Dicken, 1998). Services have come to play a critical role in the value chain because they both provide geographical and transaction connections, and integrate and coordinate the atomized and globalized production process. Dunning (1993) highlights the important distinction between ``specialized service MNEs'' and ``MNEs that produce services.'' The former includes such areas as retail, financial
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services and communications services, while the latter group includes marketing, R&D and distribution functions. Government deregulation The world trade in services, which is growing faster than the world trade in goods, represents 25 percent of the total value of global trade (Kotabe et al., 1998). In 1997, Singapore exported almost 70 percent of its total service production while the USA exported only 6 percent of its total service output[1]; however, the latter has grown by more than 30 percent since 1990 (Winsted and Patterson, 1998). Kotabe et al. (1998) indicated that the dramatic increase in the trade of services in the last decade was predominantly due to government deregulation and technological advances in data processing and telecommunications. Also, the service sector now accounts for more foreign direct investment for the leading industrialized countries than the manufacturing sector (Dicken, 1998). The dramatic increase in the globalization of services is attributed to: (1) service suppliers following manufacturers who have globalized; (2) the opening of previously closed markets such as Russia; (3) the elimination of some barriers to exporting resulting from the Uruguay Round of GATT negotiations; (4) the development of certain economies and the demand for more services; (5) technology becoming a unifying influence making national boundaries less significant (Winsted and Patterson, 1998); (6) the Internet making some services tradable and improving transaction economics of others (Kotabe et al., 1998); and (7) the acceptance of service outsourcing as firms increasingly concentrate on core competencies. Increased competition The internationalization of services has increased competition and eliminated Leibenstein (1976) x-inefficiencies inherent in government controlled pseudo-monopolies, e.g. telecommunications, airlines, banking. X-inefficiencies occur when a monopolist pursues a utility-maximizing rather than a cost-minimizing strategy and sacrifices excess profits to ease its work burden (Peterson, 1986). Upstart challengers are using new information-centric business models where access to information rather than physical assets is becoming the key differentiator. The lower costs associated with technology-based, e-commerce business models should lead to greater product, market and international competition, especially in services (OECD, 1998). Objectives The analysis has three research objectives: (1) Explore how emerging information-centric business models are replacing legacy systems; (2) Examine how electronic commerce is changing the internationalization process of services industries; and (3) Provide insight on how a new type of strategic planning is required for services in a knowledge economy. Each objective is separately addressed after the context of the analysis is established by a brief historical discussion of two types of services.
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Maximum attainable output

Historical perspective ``Specialized MNEs services'' such as telecommunications, banking, airlines, insurance, transportation, and business services (law, accounting, etc.) have been historically protected from both domestic and foreign competition by regulation (Mester, 1994). Decades of answering to government agencies rather than market forces have resulted in the accumulation of Leibenstein (1976) x-inefficiency, i.e. the deviation from the production efficient frontier that depicts the maximum attainable output for a given level of input (Kwan and Eisenbeis, 1996). In the 1980s, Evanoff and Israilevich (1991) found bank x-inefficiency to be about 20-30 percent and Yuengert (1993) found x-inefficiencies in the insurance industry to range from 35 to 50 percent. Babilot et al. (1987) found similar x-inefficiencies for other public utility monopoly industries. Liberalization and the simultaneous application of information technology severely tested incumbent firms wedded to an outdated, crumbling business model and offered tremendous opportunities for cross-industry poaching. ``MNEs that produce services'' have also experienced growing competitive pressures due to globalization and information technologies. A review of Margherion (1998), Hagel and Singer (1999), Watson et al. (1998) and Bernstein (1998) indicate that four major trends encouraged internal efficiencies: (1) firms in the 1990s began to focus on core competencies and started to outsource tangential service functions such as advertising and law; (2) the just-in-time inventory process created the need to better coordinate the supply-chain functions; (3) there was a general realization that a firm could not internally develop all aspects of the technology frontier and had to rely on alliances to keep options open; and (4) economies could be realized if global search procedures were substituted for localized club-like buying behaviors. Information technology facilitated, and in many cases, drove each of these trends, forcing firms to rethink their basic business model and creating a fertile ground for new entrants (Kambil, 1995).

Eliminating boundaries

New business models The emergence of the Internet is eliminating the boundaries that once separated corporations and countries. Commerce that once took place in local or regional markets now occurs seamlessly across most borders (KPMG, 1999). Bill Gates, CEO of Microsoft, has often been quoted as saying ``The Internet changes everything'' (Gates, 1999). Many technologists have likened the growth of electronic business to the industrial revolution of the nineteenth century it is transforming most aspects of communications, the service related aspects of manufacturing and commerce (Taylor, 1999a). Nathan Myhrvold, Microsoft's chief technology officer has been quoted as saying that ``the Web will fundamentally change customers' expectations about convenience and service'' (Taylor, 1999b). As the number of online consumers grows, the opportunity to conduct business-tobusiness (B2B) and business-to-consumer (B2C) services grows consistent with Metcalfe's law; the value of the network is equivalent to the square of the number of nodes connected to it.
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Beyond products and groups

Competition today goes beyond products and groups of products and deals with the complete business models based on information technology which recreate the customer value proposition through an imaginative mix of computer, software and network technologies (Yoffie and Cusumano, 1999a)[2]. The connectivity aspect of the Web empowers customers and provides them both the necessary information and the medium to convert intentions into purchases. This consumer outsourcing fundamentally changes the retailing business model that was in the mid-1990s based on locationallyfixed points of sale (Iansiti and MacCormack, 1997). The Web-centric business model that is emerging raises the bar with regard to customer expectations about speed, comparability and price (Hamel and Sampler, 1998). The Web business model has the added benefit of increasing rather than decreasing returns (Hagel, 1999). Unlike physical goods that require production and consumption to be balanced, information goods can be replicated at zero marginal cost and, in theory, every individual can consume all they desire (Aufderheide, 1999). The substitution of electronic customers for bricks and mortar and sales people allows Web-based retailers to focus on aspects of the business (ordering, distribution, inventory management) that are subject to economies of scale and decreasing marginal cost (Maruca, 1999). Similarly, McClenahen (1999) observed that there really do not appear to be too many limits of scale for companies that use the Internet to do business with other companies. Service companies that are willing and able to rethink their business model, at a minimum taking into account how information technology alters the business environment, will get to the future first. They will be measured by the amount of new wealth created and how they use innovation to restructure the industry (Yoffie and Cusumano, 1999b). Strategic innovation within a firm drives a rethinking about the basis of industry competition, rapidly rewrites its rules and redesigns the engine for future wealth creation (Yates, 1999). Over 50 percent of 802 CEOs responding to a Pricewaterhouse Coopers World Economic Forum Survey said it was likely that nontraditional competitors will pose significant competitive threats by using electronic commerce business as a major channel to reach their customers (McClenahen, 1999). What is astounding in a knowledge economy is the rapidity with which companies create and accumulate wealth. Between 1975 and 1995, 60 percent of the companies on the Fortune 500 were replaced (Kim and Mauborgne, 1999). What was common among most of the new entrants was that they created new markets or recreated old ones rather than competing for market share in existing markets. The OECD (1998) predicts that ecommerce in 2005 will be approximately $1 trillion dollars in retail sales. Nevens (1999) indicates that a 25 percent savings in e-commerce interaction costs is achievable and this would result in $250 billion to be shared by firms and consumers. As highlighted in Table I, the business models for the banking, publishing and music industries have already experienced radical change, while information services and advertising are beginning to experience it. Information-centric services The single most significant effect of the Internet is to cut the cost of interaction, i.e. the searching, coordinating, and monitoring that people and companies must do when they exchange goods and services, estimated to be more than one-third of the economic activity in the USA (Iansiti and MacCormack, 1999; Nevens, 1999). The Internet creates an ability to come

Strategic innovation

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Sector Music Publishing Transport Information services Retail banking Marketing and advertising Source: OECD (1998)

Degree of business substitution Radical Radical Partial Mixed evidence Radical Mixed evidence

Table I. Shifting from physical to electronic markets: changes in the business model

up with better ideas faster and increases the velocity associated with dynamic industry change. Revolutionary strategies Specialized service MNEs New technologies, changes in consumer behaviors and revolutionary strategies are making yesterday's ``scarce and unique'' resources obsolete (Tchen, 1999). For example, historically, the scarce and unique resource for book distribution was the bricks and mortar associated with retail outlets. Electronic retailing through ventures such as Amazon.com have severely depreciated these assets and introduced a new set of network-centric valuable resources. Barnes and Noble was forced to adopt a similar electronic strategy and both did between 25-30 percent of their business internationally in 1997 (OECD, 1998). As shown in Table II, there is also significant internationalization of other service businesses, i.e. music, books, electronic components, pornography, where international revenues already exceed 25 percent of total revenues. The value of substituting electronic customer linkages for traditional retailing measures was highlighted on May 21, 1999 when e-Toys went public. e-Toys had $30 million in sales and over $28.5 million in losses but raised $7.8 billion. Toys-R-Us, the bricks and mortar industry leader, with $11.2 billion in sales and $376 million in earnings had a market capitalization of only $6 billion (Margherion, 1998; Edgecliffe-Johnson, 1999). Clearly, the promises of increasing returns associated with e-Toys' new business model of the industry appears to be the most likely explanation of its tremendous initial success.
International revenues as a % of total 35 33 26 30 30 25 20 17-20 17.5 2.8

Electronic customer linkages

Company Cdnow Music Boulevard Amazon Barnes and Noble Fast Parts Virtual Dreams Dell 1-800-FLOWERS Sabre E*Trade Source: OECD (1998)

Segment Music Music Book Book Electronic components Pornography Computers Flowers Travel Consumer brokerage

Online as % of total 100 100 100 50 100 100 50 10 67 63

Table II. International trade of selected e-commerce firms, 1997

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Electronically handling the search for life insurance, completing a bank transaction, processing a consumer or stock order or getting an answer to a customer service question can reduce transaction costs by almost 80 percent; however, average cost savings are in the 15-20 percent range (OECD, 1998; OECD, 1999; Margherion, 1998). The Internet is also a potential gateway to low-cost international banking (offering domestic services to corporations abroad) through a virtual presence (almost two-thirds of the top 100 banks expect to use the Internet as a platform for global expansion (OECD, 1998). Eika and Reistadbakk (1998) state that information technology will reduce the cost of producing financial services, facilitate the efficient flow of information, create new distribution channels, make physical distance between banks and customers unimportant, weaken the position of established institutions and make banking more international. The economics of the Internet-based brokerage model are quite compelling. For example, Wit Capital offers a 1,000 share market order for only $14.95 while a Merrill Lynch voice order costs $428.00 (Margherion, 1998; OECD, 1998). Due to competitive pressures in the US market, Internet brokers are being drawn to Europe; however, E-trade only did approximately 3 percent of its trade internationally in 1997. Electronic business information services, e.g. consultancy, advertising, legal, and accounting, are a necessary complement to transactions involving physical goods and services. Relatively inexpensive telecommunication and data transport has facilitated the increasing movement of foreign investment in these service industries. Systematically reducing transaction costs MNEs that provide service Because the Internet is systematically reducing transaction costs, many companies are simplifying their business model and unbundling many business functions (Nevens, 1999). AutoByTel effectively unbundled the sales and service roles of dealerships. GE and Thomas Publishing TPN Register significantly transformed the purchasing function by aggregating and electronically posting the requirements, thereby increasing the efficiency of the market and international participation (Margherion, 1998). Member companies of the TPN Register achieve approximately 10 to 20 percent savings associated with the $15 billion annual flow of transactions by performing cheaper searches that provide access to a larger number of suppliers, from better coordination of the buyer and supplier through electronic requests for quotes, and from the lower error rate of wholly electronic purchasing processes (Applegate, 1995; Nevens, 1999). Cisco Systems has dramatically transformed the cost and quality of interaction with its customers, who can now find prices, modify product configurations, and submit and track orders electronically. Cisco has unbundled and outsourced the procurement part of the business to its customers. More specifically, Cisco Systems uses the Internet as the foundation for product design coordinating activities from geographical disperse company research centers, as a platform for support services and sales (about 70 percent of sales are on the Internet), and to assist in efficiently managing its material management supply chain (Tapscott, 1999). The company has reported savings in operating cost due to electronic interfaces of $535 million on sales of $4 billion. Manufacturers such as Kober, the largest German engineering company, say that as machines and components become more commodity-like, the real
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competitive advantage for firms will come in having the service capabilities, which are increasingly becoming information and Internet-based, to make the products work more effectively (Nevens, 1999). General Electric expects to have services account for $17 billion of its total sales of $100 billion, up from $8 billion in 1995 (Nevens, 1999). Seven initiatives Dick Anderson, IBM Enterprise Web Manager, provides a more holistic picture of the dynamic effect e-commerce is having on his business. He stated that IBM's internal e-business transformation is about more than ecommerce; it is about how IBM has Web-enabled all of its core business processes to gain speed, efficiency, and business returns (IBM, 1999). It is currently focused on seven initiatives to drive productivity gains across organizations and generate cost savings and efficiencies: e-commerce, where IBM is expected to generate between $10 billion and $15 billion in revenues over the Internet in 1999; e-procurement, where IBM in 1999 will procure over the Web $12 billion of goods and services and will save $240 million over existing methods; e-care for customers, where IBM supports over 14 million self-service user transactions over the Internet, avoiding approximately $300 million in field specialist costs (this is expected to double in 1999); e-care for business partners, where IBM currently allows 7,800 business partners (expected to double in 1999) to have worldwide access to product and market information in ten languages; e-care for employees, where IBM in 1998 did 15 percent (expected to be 30 percent in 1999) of its internal training via the Web with expected savings of $100 million; e-care for influencers, where IBM provides the press, consultants, and financial analysts tailored Web sites for world-wide access; and emarketing communications, where IBM uses the Internet to further brand and promote its products with home pages localized for 70 countries in 16 languages (IBM, 1999). Outsourcing of previously hierarchically performed service functions is becoming increasingly popular (Applegate, 1995). By strategically outsourcing and focusing a company's core competencies, managers can leverage their firm's limited skills and resources for increased competitiveness (GE, 1999). E-commerce has dramatically increased the domain of possible outsourcing opportunities and in doing so has greatly expanded many service industries, e.g. software, law, advertising, distribution. Some firms have taken this concept to its extreme and have created virtual global trading companies (Hagel, 1999; Malone and Laubacher, 1998). These service-only firms' sole purpose is to profitably bring together buyers and sellers over an increasingly specialized set of value chain functions. The increased specialization of potential business functions that can be outsourced and the breadth of outsourced functions has made outsourcing in today's knowledge economy the tool of choice for getting the needed technologies and programs online quickly (GE, 1999). E-commerce is built on ``information'' that exhibits many of the same properties common to all services industries; it is intangible, perishable, and requires consumption at or about at the same time as its production. It is thus increasingly difficult to discuss service industries without identifying the effect e-commerce has on them (Watson et al., 2000). Similarly complex is how service firms are using this wealth of information to create dynamic strategies in a paradigm shifting environment.
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Outsourcing

Business strategies for services firms Hamel (1999) describes what is needed to create a viable strategy for service firms in an information-intensive world: (1) Business has reached the end of incrementalism; catching-up is not the same as getting ahead. (2) Strategy needs to be created for the future, not the present forward. (3) Never has the business community been more hospitable to revolutionaries and more hostile to incumbents. (4) Business and governmental institutions are more likely to be aspirationconstrained than resource-constrained. Industry foresight Similarly, Prahalad and Oosterveld (1999) assert that the real basis for competition is industry foresight and the ability to imagine, create and dominate new opportunities and ultimately make new rules for new markets. Firms must seek to leverage their unique skills and knowledge of the customer value proposition and competitive differential to meet this future state and be aware of both within and across industry competition (Malone and Laubacher, 1998). The dynamic environment that is forcing service firms to become more specialized and virtual is further complicating strategy formation (Hanson, 2000). Most strategy tools of today, including Porter's Five Forces, cost curves and structure-conduct-performance (SCP), are based on Marshallian equilibrium models that assume that the industry structure is known, that diminishing returns apply and that all firms are perfectly rational (Beinhocker, 1997). For example, it was not likely that a traditional strategist would have judged the value propositions of Dell, Walmart, or CNN, to be significantly different and to rate them a sure-fire success; however, the business model of Michael Dell, Sam Walton and Ted Turner were based on increasing return dynamics and the conceptualization of an industry very different than the one they entered. In fact few, if any, of the traditional equilibrium assumptions hold in today's dynamic, technology-oriented service economy (OECD, 1998). What corporate leaders need today is a business model of the world where innovation, change, ambiguity, and uncertainty are the norms and equilibrium is the exception. Complex adaptive systems To increase their probability of success, service firms today must think in terms of complex adaptive systems (CAS) that dynamically interact based on institutionally determined rules and global competitor signals. This interaction is more complicated in cyberspace because the basic rules of the game, e.g. rules of property, security of exchange, and means of enforcement, have not been determined (Spar and Bussgang, 1999). This environment is very different from that of a service firm that historically controlled its environment (or had its environment controlled by governments), e.g. telecommunications, banking, and executed a predetermined business plan (Watson et al., 2000). CAS are open and dynamic; they receive external input from around the world and change in response to stimuli. They are made up of interacting agents capable of an infinite variety of actions. They are also emergent and self-organizing. They are created by dynamic interaction of all participants (institutions and companies) rather than as a result of top-down, central planning (Beinhocker, 1997). The Internet is a good example of such a dynamic, evolutionary system that is unleashing its destabilizing forces disproportionately on servicing firms (Hamill, 1997).
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Complex adaptive systems require a fundamental reconstruction of the economic world. They require the substitution of inductive for deductive logic because the number of interactions are too great for one to think through all possible combinations. CAS view markets as being dynamic instead of static. The change by one agent, one firm, one web of relationships could generate a ripple effect that could fundamentally change an entire service industry. Amazon.com is one good example; once it went online, it forced Barnes and Noble to also go on the Web. Also, CAS look at the would-be world, i.e. outcomes that are possible. The current extremely high valuation of Internet-based stocks, e.g. e-Toys, is looking at a future information-centric world and not the current environment. The market appears to be basing its high IPO valuations on significant first mover advantage and expectations that these businesses can scale-up quickly. Only time will tell if these companies can create and maintain barriers to entry and perform up to market expectations (Hill, 1997). Information asymmetry and increasing returns One can use CAS to explore the interesting relationships among the availability of information, the use of the Internet and service industry returns. First, however, a brief literature review of the information asymmetry and increasing returns concepts is instructive. Nayyar (1993) found that sellers of services usually have more information than the buyers do about the true quality of the service and thus are able to leverage this and achieve excess profits. However, the amount of benefit derived by the selling firm from information asymmetry is determined by the mix of search, experience and credence qualities of the service (Nayyar et al., 1993). Search characteristics, such as price, are tangible and determined prior to purchase. Experience qualities, e.g. satisfaction, speed, reliability, are not as easily evaluated and can be determined only after purchase. However credence qualities like degree of service providers' professionalism and knowledge may not be known for a long time after purchase (Holmstrom, 1985; Wilde, 1981). Nayyar (1990) found that information asymmetry is greater for services that have considerable experience and credence qualities than services with search qualities. Based on this, we would expect firms using information technology to first attack information asymmetries related to ``search'' characteristics like car and insurance policy sales. Electronic attacks on information asymmetry components associated with experience and credence will be more difficult but are possible, e.g. doctors and pharmacies on-line have to successfully attack both ``experience'' and ``credence'' characteristics. Increasing returns Arthur (1996) states that the mechanism that determines economic behavior in Western economies today has shifted from diminishing returns to increasing returns. The processing of information and the application of ideas have replaced the processing of resources and the application of raw materials. Kenneth Arrow, Nobel Prize winning economist, provided a real world example of this when he testified in the DOJ vs Microsoft Case that the software industry is characterized by increasing returns, i.e. virtually all the costs of production are in the design of the software and therefore independent of the amount sold so marginal costs are virtually zero (Arrow, 1999). Hill (1997) indicates that the phenomenon of increasing returns is an important factor leading markets to lock into a given technological standard. Arthur (1989) extends the lock-in concept by saying that people have a strong incentive to buy more of the same product so as to be able to exchange information with those using it already.
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The Internet has allowed new, information-centric firms to change the underlying industry economics. In Table III we show the path taken by these new firms and how they use information asymmetry and increasing returns forces to redefine the business landscape. Information asymmetry Going from quadrant III to quadrant II in Table III, information asymmetry between buyer and seller has been reduced because new Internet market entrants have chosen to share dealer/broker costs with the consumer. The new electronic entrants in quadrant II have little fixed cost as compared to their bricks and mortar counterparts, have shrunk overall industry margins and have designed a scalable business model with little or no marginal cost associated with incremental sales. The new electronic entrants have turned the industry from one of decreasing returns to one of increasing returns. Examples of such new business models include AutoTel.com and E-Trade. Going from quadrant IV to quadrant II, the level of information symmetry between buyer and seller has not changed (consumers know with certainty the price they are going to be charged), but the electronic business model of firms in quadrant II has replaced decreasing returns with increasing returns. The information-centric Amazon.com's business model is scalable and also forms a user community where interested readers can share information about books. This latter feature is difficult to duplicate and will reinforce Amazon's increasing return (Hill, 1997). Barnes and Noble's counter attack included an electronic offering similar to Amazon.com, but it also kept and attempted to leverage its bricks and mortar presence (Henry, 1999). Going from quadrant IV to quadrant I, the new electronic entrant's business model increased the amount of information asymmetry between the buyer and seller. Using the airlines as an example, in quadrant IV consumers could readily find out point-to-point airfares either through a travel agent or with the airlines directly. The new service in quadrant I, Priceline.com, creates an auction market for surplus airline tickets. Priceline.com has a floor price, below which it will not sell the ticket, but does not reveal that information to the customer, therefore greater information asymmetry is introduced between buyers and sellers. Priceline.com then gets bids from customers for a particular route on a particular day. In this way, Priceline.com is able to reduce consumer surplus by offering a differentiated product. This model can lead to increasing returns because it is scalable throughout the airline industry, the hotel industry and for many other service industries that have time sensitive surpluses that will earn zero revenues if they go unused.
Information asymmetry Increasing returns (I) Priceline.com GE procurement R&D alliances Auctions Information symmetric (II) Autotel.com Amazon.com E-Trade E-Toys The Internet Software (IV) Airline ticket agents Barnes and Noble (bricks) Toys R Us Traditional banking Telecommunication network

Decreasing returns

(III) Car dealers Traditional brokers Life insurance Traditional procurement

Table III. How changes in information affect service industry returns

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Innovative strategies

As firms create innovative strategies and new information-centric business models in an increasingly uncertain world, they are in effect developing a portfolio of real options. These learning options are similar to financial options and, as such, increase in value with an increase in uncertainty (Copeland and Keenan, 1998). This partially explains the high market capitalization of Web-based service firms and the vast number of start-up service firms and why established service firms are creating Web-based spinoffs, outsourcing service functions and engaging in alliances among service firms. Consistent with real options theories, Web-based alliances are different than traditional ones in four ways: (1) they involve a much larger and varied group of companies; (2) they rely on more informal business relationships; (3) they require leadership by one or two companies to define standards for all Web members and create incentives that attract more companies to it (OECD, 1998); and (4) market value is based on creating new market space rather than models predicting NPV returns (Kim and Mauborgne, 1999). However, fundamental to these alliances and real options is a desire to move from a market space of diminishing returns to one of increasing returns. Conclusion We have seen that service industries are responsible for over one-half ($3.6 trillion) of the economic activity of the USA, yet due to their intangible nature and past government protection, they are much less international than manufacturing industries. Liberalization and the Internet are rapidly changing this domestic orientation and rendering historical, monopoly-based business models of incumbent service firms obsolete. In both 1998 and 1999, Internet IPOs were very active and lucrative; however day-to-day performances were quite variable with changes in market capitalization of $10-100 million not uncommon. For many of the applications, e.g. retail, reservations, banking, the network-centric business models are informationbased and distance and geography insensitive. The dramatic increase in the availability of information and the plethora of ways to manipulate it will both increase the number and diversity of new service businesses and cause the fundamental reconfiguration of existing service industries. Service firms are increasingly turning to complex adaptive systems to do their strategic planning because they face an underdetermined dynamic environment where the rules of commerce are not established. We have seen how this very uncertainty can be used by firms to create value by increasing their options. We have shown the important relationship between information asymmetry and business returns in the evolution of service industries. Network-centric, increasing return business models will replace an increasing number of decreasing return businesses. Also because of the distance insensitivity of information, services industries will likely become more global and specialized.
Notes 1. A service export is defined as all those business activities involved when an organization markets its services outside its main domestic base of operations (Winsted and Patterson, 1998).

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This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present

Executive summary and implications for managers and executives

Services account for more than half the national wealth of the USA and more than a quarter of world trade. They are the fastest increasing component of the activities of multinational firms in developing and developed countries. The service sector now accounts for more foreign direct investment for leading industrialised countries than the manufacturing sector. Reasons for the increasing globalisation of services The dramatic increase in the globalisation of services is because of:
. . .

service suppliers following manufacturers who have globalised; the opening of previously closed markets such as Russia; the elimination of some barriers to exporting resulting from the Uruguay round of General Agreement on Tariffs and Trade (GATT) negotiations; the development of certain economies and the demand for more services; technological developments making national boundaries less significant; the Internet making some services tradable and improving transaction economics of others; and the acceptance of service outsourcing as firms increasingly concentrate on core competencies.

. . .

Emergence of the e-commerce business model Information technology, and the Internet in particular, are causing fundamental changes in the economics of service industries as new, networkbased global e-commerce business models emerge and begin to dominate. Commerce that once took place in local or regional markets now occurs seamlessly across most borders. The World Wide Web empowers customers and provides them with the information and the medium to convert intentions into purchases. It also raises customers' expectations about speed, comparability and price. The e-commerce business model has the added benefit of increasing rather than decreasing returns. Unlike physical goods that require production and consumption to be balanced, information ``goods'' can be replicated at zero marginal cost. In theory, every individual can consume all they desire. Service firms which no longer have to rely on bricks and mortar and salespeople can focus on aspects such as ordering, distribution and inventory management, which are subject to economies of scale and decreasing marginal cost. One estimate is that e-commerce can cut interaction costs (the searching, co-ordinating and monitoring that people and companies must do when they exchange goods and services) by a quarter, resulting in savings of $250 billion to be shared by firms and consumers. Similarly, there are few limits of scale for firms that use the Internet to do business with other companies. Service firms that are willing and able to rethink their business model, at a minimum taking into account how information technology changes the business environment, will get to the future first. Business strategies for service firms Today's business leaders must operate in a world where innovation, change, ambiguity and uncertainty are the norms and equilibrium is the exception.
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To increase their probability of success, firms must think in terms of complex adaptive systems (CAS). These are open and dynamic systems that receive input from around the world and change in response to stimuli. The Internet is a good example of such a dynamic, evolutionary system that is unleashing its destabilising forces disproportionately on service firms. CAS require the substitution of inductive for deductive logic, because the number of interactions is too great for one to think through all possible combinations. This very uncertainty can be used by firms to create value by increasing their options. Information asymmetry and increasing returns Sellers of services usually have more information than the buyers do about the true quality of the service and can use this to achieve excess profits. The amount of benefit derived by the selling firm from this ``information asymmetry'' is determined by the mix of search, experience and credence qualities of the service. Search characteristics, such as price, are tangible and determined before purchase. Experience qualities, such as satisfaction, speed and reliability, are not as easily evaluated and can be determined only after purchase. Credence qualities, like the service provider's professionalism and knowledge, may not be known for a long time after purchase. Information asymmetry is greater for services that have considerable experience and credence qualities than for services with search qualities. Firms using information technology can therefore be expected to attack first information asymmetries related to ``search'' characteristics, like car and insurance policy sales. IT attacks on information asymmetry components associated with experience and credence will be more difficult, but not impossible. For example, doctors and pharmacies on line have to attack successfully both ``experience'' and ``credence'' characteristics. Electronic entrants can turn an industry from one of decreasing returns to one of increasing returns. (A precis of the article ``How e-commerce is transforming and internationalizing service industries''. Supplied by Marketing Consultants for MCB University Press.)

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