Globalization Influence on Product Development

Introduction

Globalization has caused many threats and opportunities, which have caused firms, adapt their marketing strategies to meet these challenges and chances. Firms that respond with appropriate marketing strategies have found to help them improve their performance. While global market opportunities enable firms to access resources available worldwide, global threats are found to impede the success of the firms, because of the presence of an increasing number of competitors. Firms have to manage superior relationships with partners, customers and other stakeholders to ensure commendable marketing performance in the globalization era.

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Different factors such as rapid developments in information and communication technology, removal of barriers to free commerce and trade, privatization of enterprises and deregulation policies of governments have encouraged firms to expand business across borders. These factors enable firms to access new markets and lower costs by relocating their operations. However, it is argued that globalization has been found to have adverse effects on engaging basic competitive strategies. This essay presents a critical analysis of the marketing strategies as they apply to the international marketing efforts of firms in the context of globalization.

Although manufacturers of several products and services such as software, automobile and electronic products have found globalization as a feature that helped to outsource of some of their components/operations, this paper considers the proliferation of manufacture of electronic goods has the large implications of globalization. In the manufacture of electronic goods and components, there have been several cross-border investments in manufacturing facilities, as large firms are keen to derive the cost advantage in developing countries. The technology developed in countries like Korea, Japan and China has been transferred to other countries for low-cost manufacturing and sales. Thus electronic products industry is a fitting example for the impact of globalization and cross-border product development efforts.

Globalization – an Overview

Globalization has been a fast-paced and inevitable process. According to Levitt (1983), globalization has led to “a new commercial reality – the explosive emergence of global markets for globally standardized products, gigantic world-scale markets of previously unimagined magnitudes” (p. 99). Levitt (1983) argued that because of globalization “differences in national or regional preferences in business transactions and consumption patterns would disappear, thus leading to the homogenization of products, manufacturing and the vital institutions of the trade including marketing.”

Globalization is characterized with (i) the universality of tastes and preferences, (ii) the standardization of products and services and (iii) the appropriateness of marketing designs (Usunier, 1996). In addition to the integration of “trade, investment, financial market and other elements of commerce,” globalization has contributed largely to the integration of consumer markets (UNDP, 1998). Because of this integration, globalization processes are inextricably associated with competitiveness.

Product Development and Globalization

In the globalization era, the geographic distribution of knowledge-intensive work connected with product development has been observed to be a widespread phenomenon. Brockhoff (1998) reported that companies have been involved in increased internationalization of their product research and development activities. New Product Development (NPD) in the manufacturing sector was outsourced to external and internal suppliers spread across different parts of the world. In a survey conducted by McDonoughIII et al (2001), it was observed that out of 103 new products, 54 products were developed using global teams.

The study by Deloitte (2003) revealed that 48% of the companies in North America and Western Europe have established overseas operations away from their headquarters. Bennett (2008) based on Wall Street Journal article reports “Ford Motor Co. is reorganizing its design and engineering centres in a move to make the company more global while speeding vehicle development…the engineering centres, located in different regions throughout the world, will be responsible for the development of such components as engines and chassis,” (Gokpinar et al. 2010).

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Competitive Strategies and International Marketing

There are different variations of competitive strategies that firms can adopt for improving their marketing across borders. Porter’s approach includes three generic strategies of cost leadership, service differentiation and focus strategies. Thompson, Strickland and Gamble (2005) proposed another variation of generic strategies, which include “low cost provider, differentiation strategy, best cost provider, lower cost focused strategy and differentiation focused strategy.”

While cost leadership in international marketing has definite advantages of higher margins and offering protection against aggressive price reduction by the competitors, there are different risks and threats associated with this strategy (Anon, 2002). The major risk is that of losing the value of assets in a foreign location. In the process of expanding the business to foreign markets, firms engage cost-leader strategies to revamp the value-chain so that it can minimize the cost. This may include restructuring of the organization, which might lead to a gross reduction in the value of foreign assets. Also, the firm might focus more on cost-cutting and lose its focus on studying customer needs and preferences, which is vital for the success of the firm in the foreign market.

The service differentiation strategy also provides some benefits to the firm entering a foreign market. The foremost advantage is that this strategy reduces rivalry when a firm promotes its products or service, as it would be hard to copy or replicate the product or service by the competitors. The firm can attract customers who are insensitive to price but conscious of quality and can promote brand loyalty. Nevertheless, this strategy suffers from certain risks (Anon and Gillis, 2005).

With the proliferation of information and communication technology, it is easier for the rival firms to copy and provide the same differentiation and this will end in the firm losing its potential market share. Another risk associated with this strategy is that the price gap between service differentiation and low-cost rival would be significant, which might force the customers to switch low-cost rival giving up brand loyalty. There may also be a situation of over differentiation, in which the customers may not understand the importance of differentiation and the consequent price differences. This situation is likely to affect the success of the firm in the foreign market.

The concept of generic strategies advocated by Porter (1990) has been subject to some criticisms by researchers. Porter has described his marketing strategy as “stuck in the middle”. Kay (1996) argues that following the approach of a middle position provides more benefits than the high or low position approach. Kin (2004) believes that engaging a hybrid strategy, which combines more than one basic strategy, will prove successful and enable firms to achieve higher performance rather than employing pure cost leadership or service differentiation. Ismail (2003) out of his study on Malaysian giant firms found that all the successful firms studied have employed mixed generic strategies. His study found that these firms follow the practice of switching from one basic strategy to another for boosting the performance.

PESTLE Analysis and Globalization

One of the critical elements affecting the process of globalization of new product development and its localization and adaptation is the impact of different factors affecting such process in foreign countries. These factors are grouped commonly under political, economical, social, technological, legal and environmental (“PESTLE” in short) issues affecting the introduction and marketing of new products/technology in any country.

Large firms contemplating to expand in foreign countries have to take into account the impact of all these factors on the product introduction, as the future growth prospects of the product depend largely on the influence of these factors. For instance, changes in government policies concerning foreign investments or its environmental policies will affect the product introduction. Similarly, technological developments in the country and the prevailing legal systems will have a significant influence on new product development. The culture and attitude of the people also matter in this respect. Therefore, firms must take the impact of these factors before deciding on the new product development in a foreign country.

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Factors for Successful International Strategies

Porter has prescribed some additional strategies for firms to improve their international competitiveness. These include creating the feedback mechanism for upgrading competitive advantage and learning by selling to the most demanding customers. The firm should work towards finding the right location for customers, contacts and competitors and at the same time should not overdo globalization. By being selective and remaining flexible, firms may be able to derive the maximum benefits of globalization.

Competition and alliance are sure to promote growth, provided the firm is in control of its globalization efforts. Also, leaders can play an important role in promoting international growth of the firms and there is a definite need for local knowledge. However, the firms are likely to fail in achieving success in their international marketing strategies if they are unable to find the right market niche and they are unwilling to adapt products.

When the firms are unable to perceive their products and services as sufficiently unique or useful or when they assign wrong people to promote their products they are sure to fail in their international marketing efforts. Picking up incompatible business partners or inability to manage local stakeholders will also prove detrimental to the success of international marketing strategies of firms. Other factors, which impede the success of international marketing strategies of firms, include mutual distrust between the headquarters and local management and the inability of the firms to implement new and innovative ideas in all countries with equal conviction (Doole and Lowe, 2004).

Multinational Marketing Strategies and Marketing Communication

The pressure exerted by globalization has exercised a strong influence on the decisions and product development processes of several firms across different sectors. This new paradigm has enabled companies to make use of the skills and expertise of efficient engineering professionals and teams dispersed across the globe. “Best practice in product development (PD) is now rapidly migrating from local, cross-functional collaboration to a mode of global collaboration. Global product development (GPD) therefore represents a major transformation for business, and it applies to a broad range of industries” (Eppinger & Chitkara, 2006).

A careful analysis of the products and international markets lead to the adoption of a particular marketing strategy for a multinational firm to expand to foreign locations. Effective marketing communication is at the root of the success of the marketing of any product. The role of marketing communication becomes significant when a firm wants to promote its product in a global market. Firms may adopt five different strategies, which link product strategy with its marketing communication.

These strategies include

  1. one product with the same marketing message adopted for international promotion,
  2. one product with different marketing communication to promote the product in different markets,
  3. different products promoted with the same marketing communication for all the international markets,
  4. different products promoted using different marketing communications and
  5. product invention.

Fixed and centralized marketing policy has the advantage of providing maximum returns from a single product with no extra costs to be incurred for research and development for marketing the product in different territories. However, the problem with this approach is that for adopting this strategy, the product needs to be an ideal one acceptable to customers in all markets. In reality, the number of such products, which command an international image is very few. Many of the multinational companies adopt different marketing strategies to suit the requirements of local markets and they develop customized products enhancing the value-added benefit to the local customers.

While firms may have to incur additional costs in terms of marketing planning, they will be able to gain maximum profit and develop cultural acceptance with the local community. In the case of a majority of products, a uniform marketing strategy can prove to be a financial disaster. The strategy of promoting the same product with different communications will lead to a considerable saving in the research and development expenditure. However, the success of this marketing strategy needs sound marketing planning both in the preliminary marketing stage and even in the test marketing stage.

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Principles of Strategy in International Business

“When strategic planning arrived on the scene in the mid-1960s, corporate leaders embraced it as “the one best way” to devise and implement strategies that would enhance the competitiveness of each business unit” (Mintzberg, 2004). Firms adopt strategies to move to different markets all over the world for three main reasons. They are: (i) growth opportunities in the home country are found to be diminishing; (ii) the firms may think that they can create better value by transferring the business model to markets in different geographical locations, and/or (iii) the firms would like to take the advantage of first-mover into the foreign soil. For achieving these ends, firms formulate several strategies.

In generic terms, the strategy can be defined to include the actions that the managers may take to achieve the organizational objectives. For most of the firms, the foremost goal is to maximize the value of the firm to the owners of the business. To increase the value of the firm, the profitability of the firm must be enhanced. Profitability, in general, is the return which the firms would be able to make on their investments. This rate of return arrives as the ratio of the net profits earned by the firm to the total amount of capital of the firm. The profit growth can be ascertained by the percentage increase of the firm over the corresponding historic period. The following diagram illustrates the strategy of the firm for increasing its value.

Principles of Strategy in International Business

Value Creation and Porter’s Generic Strategies

Creating more value to the firm is one of the ways of increasing the profitability of the firm. The value created for the firm is measured by the difference between the cost of production at the firm’s hand and the value that the consumers attribute to the product or service. According to Michael Porter, the management expert, the value and the competitive strength of a firm is determined by the basic strategies of cost advantage and product differentiation. On the application of these basic strategies, Porter has developed three generic strategies of cost leadership, differentiation and focus (QuickMBA). The following table is illustrative of Porter’s generic strategies.

Porter’s Generic Strategies

Global Expansion and Profit Growth

Generally, the firms expanding globally can enhance their profitability as compared to domestic firms. The global firms get the distinct advantages of (i) expanding the market for their domestic products to different geographical locations, (ii) realizing the location economies by undertaking value creation activities in different parts of the world, (iii) realizing greater cost economies and (iv) ensuring a greater return on investments by utilizing any valuable skills developed in the foreign countries (International Business, 2008).

Core Competencies and Leveraging the Products

The profitability and growth of the company are largely facilitated by the activity of the firm in taking the products and services developed in the home country and selling them in the global markets. The returns to the company would be generally larger in cases where the local competitors in the countries to which the global firms take their products do not possess any comparable products.

Another factor that contributes to the success of the transnational or global companies is the core competencies they possess. These core competencies enable the global firms to excel in the development, production, and marketing of their goods and services in comparison with the indigenous competitors. Core competencies are represented by the skills that a firm possesses which cannot be matched by the competitors and they enable a firm to reduce the costs of value creation.

Location Economies and Experience Effects

The location economies are the monetary advantages arising to a firm by undertaking a value creation activity in those locations, which will provide the maximum benefits to the firm from such value creation. The location economies allow the firm to lower the costs of value creation and thereby the firm can achieve a low-cost position. Location economies also enable a firm to better product differentiation than those offered by the competitors. To garner the advantages of location economies firms normally disperse the value chain activities to those different locations around the world where the value for the firm is maximized or where the firm can achieve lower costs in creating values (International Business, 2008).

The experience curve allows the firm to apply systematic reduction techniques in the production costs, which have been found to occur over the lifecycle of a product. With the increased ability of the company to control its costs and improve its profitability, the firm starts moving downwards in the experience curve. From this, the importance of the strategic significance of the experience curve of the firm can be observed.

International Strategy

The essence of international strategy is to enhance the customer value for the firm by dispersing their major strengths to international markets, which are found lacking with the domestic competitors. The product development functions may be centralized in the home country. The manufacturing and marketing activities may be shifted to the local country with the exercise of close control by the head office. The international strategy becomes effective in situations where the pressure on the firm to respond to local requirements and to reduce the costs is found to be inadequate. In successful launching international products, there is the need to coordinate “products, services, technical support, and prices throughout the world,” (Harvey & Griffith, 2007).

Theories Discussed

This paper related the theory of Levitt (1983) propagating that globalization would lead to reducing differences in consumption patterns on a global level and there would be the development of large-scale markets for products. Homogenization of products would be another benefit of globalization. McDonough III et al. (2001) stated globalization has resulted in the new product development on a global basis with increased outsourcing by the manufacturing sector.

Thompson et al. (2005) based on their new variation of generic business strategies on the generic strategies advocated by Porter (1990). Kin (2004) proposed the adoption of a hybrid strategy for global expansion by firms, which combines more than one basic strategy. The paper also discussed factors affecting globalization and new product development both positively and negatively. According to Doole and Lowe (2004), mutual distrust between the headquarters and operations in other countries will negatively affect the generation of new and innovative ideas.

Eppinger and Chitkara (2006) suggest that new product development has adopted a new form of global collaboration. Porter (1990) advocated that by adopting generic strategies, firms must be able to develop core competencies and create value for the firm and this would increase the competitiveness of the firms. Harvey and Griffith (2007) posit that there is the need for global coordination of products, services and technical support for the successful launch of international products.

Critical Review of Theories

Although globalization is claimed to facilitate the enhancement of the prospects of a country for growth and higher standards of living of the people, it is also said to constrain the political and economic choices, because it limits the available options for product development. Hence, globalization is considered as an impediment for the generation of domestic innovative ideas. Especially in the matter of new product development, the contribution by local talents may not get due recognition and support because of cultural variations in the countries of operations.

While consumers may expect consistency and quality in certain types of goods across multiple locations, in respect of many other products, duplicating competitors’ product offerings and competing strictly on price and cost may not lead to the desired economic results. It is also felt that government protection by imposing trade restrictions would protect the national culture better than exposing people to foreign markets.

Excessive dependence on foreign technology and capital may prove detrimental to the growth of some economies. The effect of contagion is one, which was witnessed during the recent financial crisis of 2008 and this was a direct result of globalization.

Conclusion

Successful high-tech companies can bring the right products, which are well aligned with the customer requirements, at the appropriate time into the market. Rapid globalization, emerging new market conditions pose new challenges in bringing the right products to market quickly. The future growth of these high-tech companies is determined by their ability to adapt to the new market conditions and the adoption of appropriate strategies to meet the new challenges to take advantage of the opportunities created by globalization.

Companies, which over the time have developed the experience to create a roadmap for the global distribution of product development, are sure to reap the benefits of distributed development processes. Thus, while globalization offers huge potential in the area of product development, only those companies, which prepare themselves to face the new challenges of globalization through engaging appropriate strategies, will be able to capitalize on that potential by developing the right products and at the right time. Those companies, which are having high experience in the area will be able to develop global partnerships to drive product development and innovation and optimize new product development and control costs.

References

Bennett, J. 2008. Ford revamps engineering centers to speed up product development. The Wall Street Journal. Web.

Brockhoff, K. 1998. Internationalization of Research and Development. Springer, Berlin.

Doole, I. and Lowe, R. (2001), International Marketing Strategy: Analysis, development and implementation, 3rd revised edn, London: Thomson Learning.

Eppinger S.D and Chitkara A.R. “The new practice of global product development,” Sloan Management Review, (47:4), 2006, pp. 22-30

Gokpinar Bilal, Hopp J. Wallace., & Iravani M.R. Seyed., 2010. In-house Globalization: The Role of Globally Distributed Design and Product Architecture on Product Development Performance. Web.

Harvey, M. G., D. A. Griffith. 2007. The role of globalization, time acceleration, and virtual global teams in fostering successful global product launches. The Journal of Product Innovation Management 24 486–501.

International Business. (2008). The Strategy of International Business (Chapter 12). Web.

Ismail, Noor Azlin. (2003). The influence of firm size, marketing strategy and market research activities on the export performance of small and medium sized manufacturers in Malaysia. Unpublished Master Thesis. School of Management, Selangor, Universiti Putra Malaysia.

Kay, John. (1996). Globalization of the Skies. Financial Times.

Kim E., Nam, D., Stimpert J.L., (2004). Testing the Applicability of Porter’s Generic Strategies in the Digital Age: A Study of Korean Cyber Malls, Journal of Business Strategy 21: 19-45.

Levitt, T., 1983. ‘The globalization of markets’. Harvard Business Review 61(3): 92–102.

McDonoughIII, E. F., K. B. Kahn, G. Barczak. 2001. An investigation of the use of global, virtual, and collocated new product development team. The Journal of Product Innovation Management 18 110–120.

Michael E. Porter (1990), The Competitive Advantage of Nations, New York, NY: Free Press.

Mintzberg, H. (2004). The Rise and fall of Strategic Planning In J Kurtzman, G Rifking and V Grifith (Eds) MBA in a Box: Practical Ideas from the Best Brains in Business. New York: Crown Press.

QuickMBA. (n.d.). Porter’s Generic Strategies. Web.

Thompson, A. A. Jr., Strickland III, A. J. & Gamble, J. E. (2005). Crafting and executing strategy. McGraw Hill / Irwin.

UNDP, 1998. Human Development Report, p.88-89, Oxford.

Usunier, Jean-Claude, 1996. Marketing Across Cultures, Prentice Hall Europe.

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