Global Marketing 6

international product innovation and development

Roger J. Calantone and Janell D. Townsend

For millennia, individuals and firms have tried to create local or regional monopolies through differentiation. By offering a good, product, or service that was better in some (generally tangible) manner the aspiring monopolist could command a price differential from the price paid for the ordinary good purchased by the ‘‘mass’’ market. When unobservable quality or exclusivity was the differentiator, special ‘‘trademarks’’ denoted the distinctive outputs of the maker. As countries industrialized various economic sectors in the 1800’s efficiency allowed prices to fall dramatically and mass production with little differentiation began to dominate the scene. In the 1830’s clockmakers in Connecticut were able to produce clocks so cheaply that almost every working household had the means to purchase a mantle place clock, whereas in Europe at that time, clocks were still made individually – only the wealthy had clocks. Skilled workers in industries such as this, possessing both the explicit and tacit learning of their employer’s processes, immigrated to new countries where they became agents of innovation in processes that increased produc- tivity. The most common base differentiator was price accomplished through cost economies of process reengineering allowing for the mass diffusion of innovation across markets. Such engineering of efficiency reduced waste, which coincidentally has beneficial effects on quality delivered. No one country was a single source of this systematic industrialization, although resource endowments allowed some to move process innovation forward more rapidly. Thus, process innovation delivered production economies to mass markets, and in today’s global marketplace, differentiation is derived from product innovation itself.

This article reviews international product innovation taking an activist firm perspective with respect to global product development. First, an overview of the nature of strategic innovation management in global markets is presented. The strategic intent and role of stan- dardization versus adaptation in global products

is then discussed. Next follows a delineation of significant factors associated with organizing and managing global product innovation, and a conclusion summarizes.

STRATEGIC INNOVATION FOR GLOBAL MARKETS

In today’s global marketplace, the process of innovation relies heavily on flexibility, speed, and efficiency as the rates of technological innovation have increasingly shortened product life cycles, and enabled a broader and more diverse set of competitors. During this period of increasing resource constraints as well as greater competi- tive threats, companies are faced with the need to accelerate product development (Rothwell, 1994). The growing complexity and pace of industrial technological change are forcing firms to first understand the role and importance of global product innovation, how this fits with the firm’s level and strategic orientation toward globalization, and the interaction of these forces with the international marketing concept of the company.

New product development (NPD) involves the necessary but competing goals of minimizing risk by acquiring sufficient market information while reducing costs and time to market, thus escalating the importance of NPD process design and implementation (Harmancioglu et al., 2007). In other words, a firm’s NPD processes and how they are implemented are vital for decreasing lead time and increasing innovation productivity. NPD processes involve a series of stages aimed at delivering a functional commercial benefit to customers (Calantone and DiBenedetto, 1995). Proficiency in executing NPD processes is important because it deter- mines the degree to which businesses can meet and/or exceed customer demands, and thus succeed in a global marketplace (Cooper, 1991). The stages of NPD are rather universal, although various authors break it into as few as three steps and as many as forty, according to a particular application. There is no ‘‘one size fits all’’ approach to NPD, so the organizational design elements of each firm are different and come into play at different stages of the NPD process. However, each element plays a

Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra. Copyright © 2010 John Wiley & Sons Ltd

2 international product innovation and development

vital role, requiring careful consideration and planning.

GLOBAL ORIENTATION OF INNOVATION

Globalization of the firm has been conceptual- ized as the transformation of businesses from domestic, to multinational, to those with global scale and scope (Ghoshal, 1987; Perlmutter, 1969). Following the basic tenets of incremental internationalization applied to the globalization process (Johanson and Vahlne, 1977), increasing knowledge of global markets yields a hierarchical structure of potential structural orientations. This is based on complex interactions with respect to the role of market attractiveness, experiential learning, and mimetic behavior in globalization patterns (Townsend, Yeniyurt, and Talay, 2009). The level of commitment is not static over time, but dynamically ranges from initial market entry approaches such as casual exporting to very high levels of integration for the more globally oriented firms. Identifying the current firm orientation toward international- ization provides a basis for understanding the underlying philosophy that guides the organiza- tion’s approach toward international strategy and decision-making (Cateora and Graham, 2009). Global orientation is conceptualized as the orga- nization’s ability to view the entire world as its marketplace, not relying on individual markets or regions exclusively, or independently. While a multidomestic company treats customers and competitors in each country or region on a stand-alone basis, a global company takes an integrated approach across countries and regions (Birkinshaw, Morrison, and Hulland, 1995; Zou and Cavusgil, 2002). This means emphasizing the global success of the firm, as opposed to accentuating nation- or market-based measures (Ohmae, 1989), and is consistent with Perl- mutter’s (1969) original conceptualization of the geocentric firm. Yet, the implementation of a global orientation remains a major chal- lenge for leadership, when trying to integrate a global strategy and a global structure (Roth, Schweiger, and Morrison, 1991; Yip, 1992; Zou and Cavusgil, 2002). High-level strategic orien- tations such as these impact all elements of the marketing mix, with innovation and product

development being among the core processes undertaken by the firm (Townsend et al., 2004).

Three general international marketing concepts are commonly used to define level of commitment: domestic market extension concept, multidomestic market concept, and global marketing concept (Cateora and Graham, 2009). The domestic market extension concept is characterized by the selling of domestic product in foreign markets. Minimal to no adaptation is done to the marketing mix. The multidomestic market concept is characterized by a firm’s recognition of the importance of the differences in foreign markets along with the recognition of the importance of international business to its operations. Companies that operate under this approach tend to look at foreign markets as being vastly different, and accordingly, requiring a unique strategy for each country. At the core of the global marketing concept are the efficiencies that can be obtained through standardization. In general, strategy is set at a global level with the understanding that some decisions are affected by local influences and will need to be looked at on a country-by-country, or region-by-region basis. From this conceptual perspective, the entire world is seen as a market, with segments that span multiple countries.

PRODUCT POLICY: STANDARDIZATION VERSUS ADAPTATION

The globalization of product marketing origi- nates from the debate about the relative level of marketing mix standardization (Buzzell, 1968). It appears that consumer expectations around the world are beginning to converge in terms of needs and expectations as products that deliver a consistent identity have become more viable. A study identifying ‘‘marketing universals’’ found that there are few differences in consumers’ use of quality signals across cultures – yet, only for selected levels of segmentation (Dawar and Parker, 1994). Research does suggest a general degree of homogeneity across market segments which transcend national boundaries (Yavas, Verhage, and Green, 1992). This is supported by recent findings that socioeconomic variables moderate the effects of cultural dimensions on the acceptance of new products (Yeniyurt and

international product innovation and development 3

Townsend, 2003), and the degree of foreign- ness of new products is having less of an effect on performance over time (Townsend, Calan- tone, and Schmidt, 2003). Thus, product policy related to standardization versus adaptation is the function of the firm’s strategic orientation coupled with the degree of homogeneity across geographic and cultural markets.

A firm’s international product policy is critical due to cost ramifications, and the inimi- cal prospect that value creation and transmittal manifests in the product. Packaging style, quality, labeling, and brand name may seem trivial to some. Yet, these characteristics play a major part in international marketing due to the degree of calibration with cultural norms and preferences. Some products may need to be slightly altered and others not at all. Observations from the marketplace seem to support the idea of finding an appropriate balance between standardization and adaptation (Cavusgil, Zou, and Naidu, 1993; Jain, 1989b), with the premise being to embrace the concept of being global, but acting locally as necessary.

Standardization. A standardized product policy generally means that the firm will create a standard product to be sold in all markets served. However, companies will sometimes market their current domestic product internationally, as is, under the same brand name, in the same packaging, and with the same level of quality. The product policy does not change irrespective of the target market. While this approach preserves the low cost producer idea, long production runs, undifferentiated marketing, and economies of scale and experience, driving per unit variable and fixed costs downward, it ignores an inherent need for variety within any culture, and the differences of tastes between cultures. This is hubris in the face of the diversity of other cultures, and usually market punishment is quick and sure.

The primary benefits of a standardization approach to product development are the produ- ction economies and other cost savings that can be obtained. Supporters of standardization believe that price, quality, and reliability will offset any differential advantage that having a culturally adapted product would provide in

the eyes of the customer (Jain, 1989b). A stan- dardized product policy can be useful because economies of scale are created in activities, espe- cially in research, development, manufacture, and marketing (Kuvykaite, 2008). Some market segments are the same no matter where they exist geographically (Katz, 1987). Proponents of standardization argue that with the increased levels of global communication and other world- wide socializing, the tastes, needs, and values in a significant sector of the population across all cultures has become more homogeneous. The argument is that market segmentation is based on the lifestyle of the consumer, and standard- ized products can be marketed globally when the segmentation scheme is done using criteria other than geography alone. Product standardization is a forerunner of overall marketing mix standardi- zation, reducing the complexity of operations. Standardization allows for less complex orga- nizations that are easier to manage and control (Majaro, 1982).

No policy is without disadvantages though. Marketing flexibility is lost because of the inability to match the product to local require- ments. Standardization suppresses entreprene- urship because a standard global product is accepted in all markets, complacency sets in and fresh new ideas are few and far between (Wind, 1986) – some personnel may be lost to organizations that provide more opportunities for creativity in marketing and product design (Majaro, 1982). Also, standardized products can be too complicated for some markets and too simple for other markets; some markets may need extensive training before accepting a product, while others may find the product too simple and will thus reject it (Wind, 1986).

Industrial customers around the world are generally more similar than their consumer goods counterparts because their purchasing decisions are driven less by attitudes and feelings, and more by economic considerations. Because of this, standardization is typically seen as the strategy of choice for manufacturers of indus- trial products. The main concerns of industrial customers are service, dependability, quality, performance, and cost (Cateora and Graham, 2009). Also, in recent years, there has been a trend toward more international standards (e.g., ISO standards) (Usunier, 2003), providing

4 international product innovation and development

impetus for using a standardization strategy for industrial products.

Adaptation. Adapting products for interna- tional markets simply means expanding the organization’s product line (Calantone, Cavusgil, and Schmidt, 2004). Supporters of adaptation say it is inevitable. The most important objective of a firm is not minimization of costs through standardization, but long-term profitability, achieved by satisfying various consumer needs in different countries, thus ensuring greater sales (Pimblett, 1997). Many of the benefits of an adaptive product policy are obvious. For instance, the more a product is tailor-made for a specific market, the better it will fit the needs of the customers (Calantone, Cavusgil, and Schmidt, 2004). This, in turn, should lead to higher sales and sustained growth. A product adapted to a target market based on market research is more likely to succeed, and therefore carries less inherent risk than a standardized product.

Drawbacks to the adaptation approach can include increased costs related to research and development and the loss of scale economies. There may also be an increase in the complexity of the organization in response to the addition of foreign market operations to the preexisting domestic market operations. This will add a level of complexity to the management and an overall control of the organization. When defining the level of international commitment, management should ensure that they have the appropriate level of resources committed to the foreign endeavors (Cateora and Graham, 2009). From a consumer’s standpoint, multiple products with different packaging and different brand images can cause identity or credibility problems.

Adaptations can be grouped into two cate- gories: obligatory adaptation and discretionary adaptation. Obligatory adaptations are defined as those that an exporter is forced to undertake because of regulations that must be met in order to enter a foreign market or because of external environmental factors (e.g., climate considera- tions). Discretionary adaptations are voluntary adaptations that a firm undertakes in order to better align its product with market needs or other cultural factors (Jain, 1989a).

Several considerations come into play when determining the level of adaptation necessary for a product in a foreign market. In order to understand all the possible ways a product can be adapted it should be deconstructed into components based on benefits delivered. Major adjustments to the core component can be costly if changes to the production processes must be made to accommodate the specialized products. This may require a large capital investment. Auxiliary components include things such as packaging which protect the product’s integrity, but also serve as a communications platform, sometimes tightly regulated by governmental edits.

The importance of the features contained within the packaging component depends on the need that the product is designed to serve. For example, in countries where literacy levels are relatively low, packaging must include symbols or pictures to aid the consumer in identifying the contents of the package and the appro- priate usage. In other instances there may be legal requirements for labeling (e.g., information printed in multiple languages). It could also be the case that package sizes are regulated by law. External environment factors, such as humidity, could also bring about the need for adjustments to packaging. In some countries, such as Japan, the quality of the packaging has a direct impact on the consumer’s perception of the quality of the product within.

In addition to the physical and service aspects of product adaptation, the impact of the symbolic attributes related to a product must also be examined (Usunier, 2003). In order to determine the symbolic attributes a product may have, a firm needs to first understand the culture of the country in which the product will be sold, including elements such as materialism, social institutions, belief systems, and language. There are two types of cultural knowledge that are necessary: factual and interpretive. Factual knowledge can be easily learned; interpretive knowledge, conversely, requires cultural insight usually acquired through personal experience.

ORGANIZATIONAL DESIGN

Organizational design elements are critical to success if product innovation and management

international product innovation and development 5

is to be successful across global markets. Global organizations need to determine and achieve a balance between central authority and respon- siveness to local preferences that optimizes their business position (Johansson and Yip, 1994; Roth, Schweiger, and Morrison, 1991). Influ- ential organizational design elements include formally planned stages, senior level involve- ment, business case preparation, customer input, and cross-functional integration (Barczak and McDonough, 2003), while a business case delineates project goals, market projections, and possible product specifications (Harmancioglu et al., 2007). Coordination mechanisms in NDP include linking electronically geographically dispersed parts of the organization via intranets, extranets, and so on (Boudreau et al., 1998), best practice repositories, and lead centers of excellence (Frost, Birkinshaw, and Ensign, 2002).

Subsidiary integration and global product mandates. A general trend has been observed such that multinational corporations have begun initiatives focused on integrating value-added activities which were once globally dispersed. This global dispersion occurred as a response to host government import/export regulations and tariffs, but with the globalization of business in recent years, these types of dispersed orga- nizational structures are no longer necessary. Utilizing formal and informal interfunctional coordination mechanisms allows organizations to achieve global responsiveness while balancing flexibility and efficiency (e.g., Bartlett and Ghoshal, 1987; Martinez and Jarillo, 1991). With increased globalization foreign subsidiaries are now being used in more specialized roles with greater market scope (e.g., exporting) but narrow functional and/or product responsibility (Birkinshaw, 2002). World product mandate gives global responsibility to a subsidiary for development, manufacturing, and marketing of a single product line. Although full-scope mandates of this nature are relatively rare, regardless of scope, the primary outcome of the mandate process is greater specialization in terms of focused product responsibility (Birkinshaw, 2002).

In terms of specialization there are two theo- retical approaches: rationalization-integration

and world product mandate. Rationalization- integration occurs when a subsidiary produces a component under assignment from the parent organization for the firm as a whole. Exporting is controlled by the subsidiary but upstream responsibilities such as development and design are controlled by the parent orga- nization. Full-scope world product mandate, as mentioned previously, gives full control of development, manufacturing, and export marketing to the subsidiary. In this type of relationship, the subsidiary acts more as a partner than a subordinate to the parent and has a higher level of autonomy than in the rationalization-integration approach (Birkin- shaw, 1996). In practice, a hybrid approach is more commonly observed; for example, a subsidiary may have global production and marketing responsibilities but utilizes central R&D resources for new product development.

There are four motives that are generally accepted classifications of subsidiary mandates: market-seeking, resource-seeking, efficiency- seeking, strategic asset-seeking (Birkinshaw, 1996). Each has a set of characteristics related to the business benefit the parent organization is attempting to achieve via the mandate. There are several challenges related to the establishment and management of subsidiary mandates. One such challenge is the restructuring of the orga- nization to accommodate a new decentralized decision-making and reporting structure. The estimated value addition from the subsidiary should be able to cover the costs associated with this restructuring. Also, typically, the products assigned as a part of the subsidiary mandate approach are usually products at the end of the product life cycle. Care must be taken to ensure that the subsidiaries remain relevant to the current strategic vision of the parent organization even if the primary focus is on a product that is not at the forefront for management. Lastly, because of the specialized nature of these mandates, foreign subsidiaries are vulnerable to changes in the marketplace. If subsidiaries are unable to adapt to the market changes, or if organizations are unprepared to shift mandates to different subsidiaries to meet market needs, the mandate approach will be unsuccessful (Birkinshaw, 1996).

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Open innovation. Traditionally, the ideas and concepts that feed innovation have been generated via experts and/or scientists within internal research and development departments. Recently, more organizations have adopted an approach which includes ‘‘open innovation’’ in the new product development cycle. Open innovation utilizes ideas and inspiration from ‘‘creative consumers.’’ These creative consumers differ from mainstream consumers in that they are excited by new ideas whereas mainstream consumers tend to like what they already know. The open innovation theory proposes that tapping into these creative consumers will help to overcome the thinking that most market research is backward looking as opposed to the forward-looking approach that is needed for product innovation (Clegg, 2008).

The engaged consumer has always existed, but now they are easier to identify and access via social networking and user-generated com- munities. The openness emerging from user- generated forums is where the true gain accrues relative to the classic opinion/idea collection methods of surveys and focus groups. The use of the web as a means of communication gives companies access to consumers on a global scale which is more difficult and expensive using the classic methods of data collection. This broad and global perspective on consumer ideas gives companies an advantage when attempting to generate breakthrough innovations.

Although disruptive product innovation appears to be key to the long-term health of an organization, there is no assurance that the ideas generated from open innovation mechanisms ultimately lead to these highly coveted product outcomes. The volume of information acquired can itself hinder the creative process. Automated tools provide an information capture mechanism, but the screening and sifting task to discover something commercially successful can be frustrated in many ways. This uncertainty drives many firms to opt for incremental product line extensions that utilize their current business capabilities as opposed to the more risky breakthrough innovation route.

Cooperation in the new product development process. The complexities of the global

marketplace have required companies to forge new vertical and horizontal alliances and to seek greater flexibility and efficiency in responding to market changes. These multifaceted and complex organizational relationships seek to establish or extend a firm’s differentiation by way of an alliance, either vertically in its value chain or horizontally through either competitors or complementary companies. Since alliances allow for the pooling of resources, it stands to reason that they would create a broader range of resource opportunities in the product innovation process. Through alignment and extension, collaboration with a partner provides an opportunity to fulfill the requirements of a sustained competitive advantage, which cannot be achieved independently; through the efficient use of a partner’s existing resources, the boundaries of the firm can be effectively extended. This includes knowledge sets that are both externally facing like culture and markets, and those that are internally oriented like product-specific processes.

In recent years, the trend has been for orga- nizations to cooperate with different external partners as a way to enhance the efficiency and effectiveness of the new product development process, cut costs, and to reduce risk. These partners can include distributors, consumers, universities and research centers, and even competitors. Studies suggest that there is a positive relationship between cooperation and the achievement of success in the process of innovation. Cooperative alliances can be divided into two categories: (1) those based on synergies and complementary assets; (2) those based on growth opportunities and market power (Arranze and Arroyabe, 2008). Cooperation can be further identified as ‘‘vertical’’ or ‘‘horizontal’’ cooperation, respectively. Vertical cooperation (also known as supply chain cooperation) plays an important role in the collection of information on technologies, user needs, and markets. Partnerships with suppliers are seen as a complement to internal R&D activities as opposed to a substitute for them, and partnering with customers reduces the risks associated with market introduction. With horizontal cooperation, competitors may have complementary resources which will allow both parties to reduce costs and risks in large projects.

international product innovation and development 7

These types of partnerships are best suited for scenarios where either a strong common interest has been identified, for example, cooperating on the development of a new range of product or services, or scenarios where the resulting research leads to generic results (Arranze and Arroyabe, 2008).

There are a number of benefits derived from using a cooperative approach to new product development (Vilaseca-Requena, Torrent- Sell- ens, and Jimenez-Zarco, 2007) – for example, the establishment of work teams made up of experts in different functional fields who adopt flat structures (e.g., minimal layers between employees and management) that are highly adaptable, wherein decisions are taken in a decentralized way. Cooperation also favors the creation of products designed for and adapted to new needs and demands, and the development of a more efficient process of innovation that incorporates the ‘‘voice of the consumer’’ together with the experience and know-how of other partners. It also reduces the uncertainty surrounding the product’s future and its dependence at the time of product launch, while improving on the results obtained.

Yet, it has been estimated that approximately 60% of established cooperative relationships fail, and there are various factors that have been identified as barriers to effective cooperation. Lack of familiarity between the partners, the distance that separates them, and the absence of prior collaboration experience are noted as the most important inhibitors of the process of cooperation. The issue of lack of familiarity arises when the primary organization fails to research what each partner’s desired benefits, level of risk aversion, level of commitment, and strategic similarity are prior to the beginning of the project. The issue of distance can be phys- ical, time related, or cultural. The last inhibitor, the absence of prior collaboration experience, arises when partners have not been a part of these types of alliance previously. The thought is that partners with prior experience will be more able to efficiently and effectively partner with organizations in new alliances making the overall management of the relationship easier for all parties (Vilaseca-Requena, Torrent-Sellens, and Jimenez-Zarco, 2007).

Partner selection and management is inher- ently important. Prior to beginning a project, each party should agree to the specific benefits to be gained from the relationship, as well as the risks and compromises they are willing to accept. When selecting partners to join these types of alliances, special consideration should be given to whether the partner has the necessary resources/capacity to meet agreed commitments, whether the partners’ culture or strategy is compatible with the primary organization, and whether the help of the partner can increase the efficiency and efficacy of the innovation process (Vilaseca-Requena, Torrent-Sellens, and Jimenez-Zarco, 2007).

Product platforms. Expanding internationally can be a difficult and costly task. To circumvent some of the costs and problems associated with this, many firms use product platforms. Broadly defined, a platform is a set of product components that are physically connected as a stable subassembly and are common to different final models (Muffatto, 1999). In other words, it is a foundation that can be used to create several different final prod- ucts. The automobile industry uses product platforms for several components that are used in a variety of their models. The product plat- form concept represents a powerful approach for manufacturers to compete cost-effectively in a global market that requires diverse product range, quick time to market, and rapid responses to supply sources (Zhang, 2008).

There are many benefits to using product platforms. It creates flexibility by allowing companies to produce multiple product vari- ations with limited impact on production and assembly processes. It also reduces the need for a large number of parts, which in turn reduces the amount of suppliers needed, and reduces costs. Another key benefit derived from the use of product platforms is a reduction in lead-time, and the reduction or elimination of many preassembly operations that reduces the throughput time. This helps companies react to market changes faster.

The biggest challenge in using product platforms is how to strike a balance between commonality and modularity. In other words, how common can a product line be while still creating enough variations to satisfy the global

8 international product innovation and development

market? The concept of platforming enables the manufacturer to further ‘‘commonize’’ the product family into fewer variants in order to take advantage of economies of scale (Zhang, 2008). However, platform approaches often result in the reduction of the range of customer choices, which can hinder overall sales.

Global product development teams. There is further complexity involved when broad geographical considerations are added to the innovation management and NPD equation. Global new product development teams are often established to address the needs of common global markets, to incorporate the unique needs of local markets, and to bring together globally diverse resources and expertise (Barczak and McDonough, 2003). Yet, these teams are often difficult to manage because of geographic and cultural diversity; these groups can achieve a higher level of performance if there is a significant degree of information exchange (Cummings, 2004). There can also be conflict between functional group members such as engineering and marketing (Maltz and Kohli, 2000), which impedes the effective development and ultimate success of new products – this effect can be exacerbated in culturally diverse groups. Thus, it is argued that the way work centers are structured and their relationship to the international network should be based on the underlying characteristics of a firm’s knowledge-based assets (Birkinshaw, 2002) and the global strategic orientation of the firm.

CONCLUSION

Managing global product innovation and development presents quandaries for interna- tional companies with respect to balancing the need for within-country representation with between-country comparability. As efficient production processes themselves became commonplace, product differentiation emerged as a key in creating a sustainable competitive advantage. This article reviews some of the more salient issues faced by managers of product innovation and development in a global marketplace. Global strategic orientation of

the firm plays a key role in determining the nature of product development, interacting with the degree of global market segmentation for the industry to determine the relative level of product standardization or adaption to be supported. This is a key point because of the costs and benefits that can accrue to the firm through innovation. Organizational design structures and elements support the NDP processes, and are particularly complex for global products and variations. As the world continues to become more integrated through technological advancement, governmental ini- tiatives, and infrastructure improvements, global product innovation and development will evolve to meet the challenges of the marketplace.

ACKNOWLEDGMENT

Special thanks to Angel Lynch and Shane Meldrum for their help on an earlier version of this article, and to Ahmet Kirca for critical commentary.

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