With mostly saturated markets in developed countries, the markets of the emerging economies constitute the major growth opportunity for most multi-national corporations (MNCs) today. But tapping into the potential of these markets is no easy task. Simple export strategies with little or no responsiveness to local needs failed numerous times. MNCs often have the wrong mindsets to be successful in these markets, assuming these markets will go through the same process of development as the western markets, only ten or twenty years behind. Product policies therefore concentrate on dumping old and outdated products in these markets. Many MNCs had problems with this way of approaching emerging markets, as they have unique requirements that need to be considered. Backward innovation, the deliberate simplification of existing products, can be seen as one strategy that responds to those needs and can be very successful in these emerging markets. Backward innovation falls back on using existing, but modified products; a successful use of this strategy may well be a way to extend the life of a product that finds itself already in the maturity or declining stage of its life cycle in its home market.
To examine how backward innovation is used in global (particularly in emerging) markets and how successful it is in extending the life of a product will be the main focus of this paper.
Table of Contents
List of abbreviations
1 Introduction
1.1 Problem set and essay questions
1.2 Methodology and structure
2 International trade and the product life cycle
2.1 Strategies for mature and declining products
2.2 The international product life cycle
2.3 Market potential of emerging economies
3 Extending product life cycles through backward innovation
3.1 Basic underlying concepts
3.2 Case examples of backward innovation strategies
4 Critical evaluation
4.1 Backward innovation
4.2 Beyond product simplification
5 Conclusion
References
List of abbreviations
illustration not visible in this excerpt
1 Introduction
1.1 Problem set and essay questions
With mostly saturated markets in the developed world, the markets of the emerging economies constitute the major growth opportunity for most multi-national corporations (MNCs) today.[1] But tapping into the potential of these markets is no easy task. Simple export strategies with little or no responsiveness to local needs failed numerous times.[2] MNCs often have the wrong mindsets to be successful in these markets, assuming these markets will go through the same process of development as the western markets, only ten or twenty years behind. Product policies therefore concentrate on dumping old and outdated products in these markets. Many MNCs had problems with this way of approaching emerging markets, as they have unique requirements that need to be considered. Backward innovation, the deliberate simplification of existing products, can be seen as one strategy that responds to those needs and can possibly be very successful in these emerging markets. Backward innovation falls back on using existing products; a successful use of this strategy may well be a way to extend the life of a product that finds itself already in the maturity or declining stage of its life cycle in its home market.
To examine how backward innovation is used in global (particularly in emerging) markets and how successful it is in extending the life of a product will be the main focus of this paper.
1.2 Methodology and structure
In order to examine the use of backward innovation as a way to extend product life cycles globally this paper begins with a discussion of the underlying rationale of backward innovation strategies. It will first give a description of the product life cycle concept and the generic strategies commonly used for extending the life of products in chapter two. Furthermore, it will look at the situation that MNCs are facing after a product went through the earlier phases of the product life cycle and enters the maturity and decline phase. Vernon states that a product at this point will most likely enter the international product life cycle. In order to delay the end-life phase of a product MNCs try to tap into the potential of other markets; in the scope of this paper these will be mostly limited to the emerging economies of Brazil, Russia, India and China (BRIC). The analysis of the potential of these emerging markets for MNCs will conclude the discussion of the underlying assumptions of backward innovation strategies.
In order to be successful in these markets, products need to be adjusted to the requirements of these mostly low-income customers, thus MNCs turn towards backward-innovation. The concept of backward innovation per se and the ways companies are currently approaching it with scaled- or stripped-down products will be examined in chapter three. This part will also discuss several practical case examples of successful applications of backward innovation strategies such as the Volkswagen Beetle in Latin America or Nokia and Motorola mobile phones in China.
In chapter four, the concept of backward innovation and its underlying assumptions are critically evaluated and extensions of backward innovation strategies that go beyond merely selling old products in new markets are discussed. The principal reasoning here is to approach emerging economies with newly developed products that better suit the needs and requirements of low-income customers. Practical examples will again be discussed, e.g. the Fiat Palio or the “100-dollar-pc” that is currently being developed.
The paper concludes with a summary of the gained insights and a discussion of the implications backward innovation holds for MNCs.
2 International trade and the product life cycle
One very important concept of product development and marketing theory is the product life cycle model. In order to extend the life of a product, firms can make use of several strategies, mostly developed during the later stages of the life cycle, the maturity and the decline phase. Backward innovation can essentially be seen as a blend of several such strategies, therefore, in order to better understand backward innovation strategies and their possible role in extending a product’s life cycle, the life cycle concept itself as well as the single components of backward innovation, namely market expansion and product variation, will be discussed in greater detail in the following chapter.
2.1 Strategies for mature and declining products
The concept of the product life cycle has occupied a rather prominent place in marketing literature as a forecasting instrument and a guideline for corporate marketing for some time.[3] The conventional product life cycle is a concept of marketing research that tries to describe a product’s life by a sequence of four cycles that it goes through over time. These are the introduction, growth, maturity and decline stages (some scholars add a cycle “zero” to this concept, which would be the product development per se). The introduction stage is characterized by the high costs of product introduction and slow growth. After a while, the product will enter the growth stage, where it will see fast growth and first profits with little competition, but still relatively high marketing costs. During the third, the maturity stage, growth will start to slow down, sales and returns are stable, but competition intensifies. During the last phase, the decline stage, sales numbers and earnings dwindle further until they eventually cease.[4] At this point, possible life cycle extension strategies will be derived or the product will be eliminated from the company’s product portfolio.[5] Marketing and product development literature intensively discusses ways to deal with the later phases of maturity and decline in order to extend the life of a product so the product can generate further revenues. As the product itself may be the result of high costs of research and development, it is only logical that firms try to harvest the profits of a product for as long as possible.
In the maturity stage, the product has reached all the consumers who might purchase it in a particular market.[6] Keeping this in mind, general strategies for an extension of the product life cycle can be summarized as
- promoting more frequent uses of the product among current users,
- developing more varied uses of the product among current users,
- creating new users for the product by expanding the market or
- finding new uses for the basic material.[7]
With regards to backward innovation, this paper will only focus on the third strategy, the creation of new users for an existing product. The concepts most commonly mentioned for this strategy are product variation, repositioning and relaunch activities as well as market expansion strategies. Backward innovation can be defined as a sum of these parts; therefore the individual concepts shall be briefly discussed first.
In order to acquire new customers for an existing product, the choice for product variation is the least drastic one as this is only a change in looks and design of a product, while product repositioning or relaunch can be described as a variation in the value-adding features of the product including the quality, the branding or the layout.[8] Product changes can generally be used in any phase of the product life cycle but are most commonly applied in the maturity phase when the sales curve starts to decline, the customer base stagnates and market shares are not increasing anymore.[9]
Another way to win new customers is a market expansion. As the name implies, such a strategy tries to improve performance through the expansion of a firm’s activities. This expansion may either come through the claim of new markets or through a market share gain through competitor confrontation.[10]
2.2 The international product life cycle
In line with the aforementioned findings, the international product life cycle further explains the behavior of firms that find their products in a decline or maturity phase. In essence, a company in a developed country that created a product as a local innovation to satisfy customers’ needs tries to generate further profits by selling its technological breakthrough abroad.[11] The international product life cycle, first introduced by Vernon in 1966, states that the direction of sales will change over time with the changing phases of the product life cycle[12] and describes how firms are responding to increasing competition and product maturity in home and foreign markets.[13] Once the home market matures, competition increases and sales decline. The company will then start to look out for other markets. The exporting firm will try to identify the most attractive markets that it can serve in terms of customer preferences, patterns of competition and its own strengths.[14] The first step here is to look at other advanced country’s customers that are able to afford and buy this particular product.[15] The homogeneity of these markets enables companies to sell the same product more or less unchanged to new customers. Some companies have even started to launch products simultaneously in the United States, Europe and Asia since customer needs in these markets are converging strongly and are becoming almost identical for certain products.[16] The next step in the international product life cycle is the emergence of foreign competitors. Once the demand in foreign markets increases, those markets reach a critical size that is sufficient to support local competitors to enter the market. In the next phase, once profit margins start to decline and these markets reach saturation as well, companies will start to look at less developed countries, either for production purposes to gain cost advantages, or for sale purposes.[17] In summary, the international product life cycle says that international strategies extend the regular product life cycle. This is now where the emerging economies become relevant. As more and more products are launched as “global” products in the three big markets of North America, Europe and Asia at the same time, the one step that is left to increase the customer base once these markets mature is the expansion into emerging markets such as Latin America, Russia, Africa or China. More and more MNCs start to realize that the emerging markets have immense potential that is ready to be harvested. The problem most companies are facing is their own product policy though. With sophisticated, high-technology products, only a very small segment, the high-income upper class of these countries can be targeted, which is only the tip of the iceberg of the potential of emerging economies. In order to target the bigger part of this iceberg, new product development strategies need to be sought that serve the lower-income population of emerging economies.
2.3 Market potential of emerging economies
One of the most important economic and social changes of the twentieth century took place after the end of the Cold War. Many former communist countries with centrally planned economies such as China, India, the former Soviet Union or Latin America opened up for the capitalist mindset and offered vast opportunities.[18] In 1992, developing countries already received 18 percent of foreign direct investment (FDI)[19], and by 2002 the inflow of FDI into developing countries was up to 35 percent of total FDI.[20] Not only did they receive a big amount of FDI inflow, but they also accounted for twelve percent of the world’s FDI outflows in 2002, a sign of growth and the growing importance in global markets.[21] A study by Delphi on business, policy and academic leaders showed that an overwhelming majority places great importance on emerging economies as the biggest source of future growth.[22] Especially the BRIC countries seem to be very attractive for foreign companies.
Despite the “hype” and the increase in attention the emerging markets get, these markets are still poor. The so-called bottom-of-the pyramid segment of the world is made up of approximately five billion people who live on less than two dollars a day.[23] Even the BRIC countries, the champions of the developing countries, only have a per capita income of $7,400 a year, with a high degree of unequal distribution and large parts of the population living below the poverty line.[24] These parts of the population are usually not recognized by MNCs as customers because of their low income and rather difficult accessibility, they do not belong to any target group; yet. Nevertheless, this bottom-of-the pyramid segment of consumers is changing; what is becoming increasingly interesting for MNCs in countries such as China or India are the new consumer bases that consist of hundreds of millions of people that are just emerging, a new middle class that is hungry for consumer goods and a better quality of life.[25] MNCs are trying to tap into this emerging potential, since their home markets are mostly saturated, with little or no growth at all.[26] The annual CEO survey on globalization and complexity conducted by PriceWaterhouseCoopers shows that an average of 77% of companies doing business or planning to do business in the BRIC countries mostly do so to access new customers.[27]
The developments in the emerging economies and the increasing competition among MNCs in the mature markets in the developed economies make it rather clear why these new consumer groups start to show up on the radars of many MNCs lately and explain the quests for new strategies in product development.[28] Most companies stuck to their traditional strategies using standardized approaches for these new markets while some are experimenting with some local twists. Many companies are still struggling to develop successful strategies that suit these markets.[29] Backward innovation may be one such strategy and will now be analyzed in greater detail.
3 Extending product life cycles through backward innovation
3.1 Basic underlying concepts
Facing mature home markets and the promises of the global markets, an important question for many firms must be the international product policy; whether to create a global product strategy that makes use of marketing and development standardization as much as possible or to what extend products must respond to local needs and differences.[30] Linking the generic extension strategies, a backward innovation strategy is the combination of the concepts of product repositioning and market expansion via an internationalizing strategy (as was discussed in chapter two). In short, backward innovation is a conscious simplification of an existing product, hence “backward”.
Backward innovation shall be defined as a product strategy for foreign (typically emerging economy) markets, consisting of “[…]a narrow range of basic or stripped down products, which the corporation has ‘value engineered’ for the different conditions in emerging economies, and which are affordable, easy to use, reliable under tough environmental conditions, and easy to maintain”.[31]
A company tries to enter a new market segment by using a product that already exists. The difference to a generic export strategy in this case is that the company intentionally takes an outdated or simplified product into a new market, hoping to generate additional profits and slow down the decline phase of the product’s life cycle. To change a product is one general way to extend the product life cycle and to introduce stripped-down versions of existing products can be one way to realize these changes.[32] The international product life cycle assumes that companies will also try to expand their markets, first to homogeneous markets with similar customer profiles and later to developing countries. The problem of expanding to emerging economies can be seen in the low per capita income in these countries. To simply take a fully developed high-technology product and export it into these countries might not be sufficient, as most of the customers will not be able to afford this product. Also, the pricing formula used in western countries can not be used to correctly price a product for developing markets. London and Hart found in their study of international businesses that in the past, MNC managers thought that they could rely on old technology of existing products and minor adaptations to their existing distribution channels in order to be successful in these markets. Although they successfully leveraged their knowledge in this case, the technology they used was more than 10 years old. The result of this strategy was that the product was much too expensive for the low-income segment of the market, and technologically unattractive for the high-income segment, thus the expansion failed.[33] Products might be too sophisticated and the general infrastructure needed for certain products is rarely given in the poorer segments of the emerging markets, i.e. climate issues, power accessibility, internet connectivity etc. In addition, the technical nature of a product may require service work before and after the sale. In many foreign countries, the intermediaries may not be able to handle this kind of work.[34]
With backward innovation, the product change is therefore a change of the products core technology components. These changes can lead to competitive advantages if they either result in a cost advantage or a differentiation advantage.[35] Using backward innovation, the company essentially tries to realize both aspects, as the cost advantage of stripped-down products allows the company to offer the product for reasonable prices that the broad mass of emerging economy customers can afford. On the other hand, the company tries to deliberately simplify the product to suit the customer’s desire for simpler and more reliable products, thus differentiating it from other products.
A study comparing customer needs in one developed and one less developed country (France and Malaysia) showed that the relatively low individual purchasing power in emerging markets and the relatively low level of economic development (and the accompanying limited product availability) leads many consumers in emerging markets to focus on more objective product attributes more closely related to the actual product core such as product quality and reliability.[36]
Many companies from developed countries have made the frustrating experience in the past that their products were too sophisticated or seemed out of place in emerging economies, thus sales were not developing as planned. When Volkswagen entered the Chinese market with its Polo model, sales were far behind expectations. This is mostly due to the complex nature of modern products that are not as robust and reliable as past products and often need intensive specialist maintenance, relying more on computerized diagnoses then on mechanical knowledge.[37]
[...]
[1] Cf. Arnold, D. J. /Quelch, J. A. (1998), p. 7.
[2] Cf. London, T. /Hart, S. L. (2004), pp. 355-359.
[3] Cf. Youngme, M. (2005), p. 87.
[4] Cf. Wind, Y. J. (1982), pp. 45-49.
[5] Haedrich, G. /Tomczak, T. (1996), pp. 237-240.
[6] Cf. Hisrich, R. D. /Peters, M. P. (1991), p. 434.
[7] Cf. Wind, Y. J. (1982), pp. 60-61.
[8] Cf. Herrmann, A. (1998), p. 536; Haedrich, G. /Tomczak, T. (1996), p. 237.
[9] Cf. Hüttel, K. (1992), p. 212.
[10] Cf. Hooley, G. J., et al. (2004), p. 392.
[11] Cf. Onkvist, S. /Shaw, J. J. (1983), pp. 73-74.
[12] Cf. Vernon, R. (1966), p. 190-207.
[13] Cf. Giddy, I. H. (1978), p. 90; Jacobs, L. W., et al. (1997), p. 76.
[14] Cf. Albaum, G., et al. (1994), p. 87.
[15] Cf. Onkvist, S. /Shaw, J. J. (1983), p. 74.
[16] Cf. Hill, C. W. L. (2005), p. 6.
[17] Cf. Giddy, I. H. (1978), p. 90.
[18] Cf. Prahalad, C.K. (2000), p. 1.
[19] Cf. Arnold, D. J. /Quelch, J. A. (1998), p. 1.
[20] Cf. Hill, C. W. L. (2005), p. 218.
[21] Cf. Wright, M., et al. (2005), p. 1.
[22] Arnold, D. J. /Quelch, J. A. (1998), p. 7.
[23] Cf. Simon, H. (2006), p. B1; Prahalad, C. K. (2004) p. 70.
[24] The average was calculated using current GDP-per capita numbers from the CIA world fact book https://www.cia.gov/cia/publications/factbook/index.html.
[25] Cf. Shainesh, G. (2006), p. 69.
[26] Cf. Arnold, D. J. /Quelch, J. A. (1998), p. 7.
[27] Cf. PriceWaterhouseCoopers (2006), p. 11.
[28] Arnold, D. J. /Quelch, J. A. (1998), p. 8.
[29] Khanna, T., et al. (2005), p. 63.
[30] Cf. Hult, T. M., et al. (2000), p. 206.
[31] Arnold, D. J. /Quelch, J. A. (1998), p. 15; Allot, A. (2002), p. 28.
[32] Cf. Wind, Y. J. (1982), p. 59.
[33] Cf. London, T. /Hart, S. L. (2004), pp. 358-359.
[34] Cf. Albaum, G., et al. (1994), p. 158.
[35] Cf. Porter, M. E. (1998), pp. 169-171.
[36] Cf. Hult, T. M., et al. (2000), p. 216.
[37] Cf. Hofmann, J. (2006), p. 23.
- Citar trabajo
- Anónimo,, 2006, Backward innovation - An opportunity to extend product life cycles on a global basis?, Múnich, GRIN Verlag, https://www.grin.com/document/77341
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