International Product Policy: The Basic Product
Many German companies are actively selling their products into global markets, and they are successful in the globalization business. For many years, Germany has the largest trade volume of all countries worldwide.
Although the current climate in 2009 is not very favorable for the world markets (the World Trade Organization WTO is → estimating a decline of 9% in the world trade of 2009), the success of this country on the world markets is important for the country, the companies, and the inhabitants.
As international trade, and exports are important for participating countries, the question is what their companies need to do in order to be successful abroad.
Which products to export?
One of the most relevant questions for a firm (newly) approaching international markets, is, which products to sell abroad, and how these products should look like. The one side of the coin is thereby the market view („how successful can we be“), and the other view is the cost-oriented view („economies of scale“).
In particular each company with international ambitions needs to define, if these products should be standardized („one size fits it all“) or if they are to be adapted to local markets. Often the product management drives this very important question, or is at least part of the decision process.
Adaptation versus Product Standardization
The most easiest way of a small firm that is just beginning to approach international markets, is to sell the same products as they are designed for the home market, without any or few changes abroad (standardized product).
On the other hand of the spectrum would be a company, which designs products for each individual target market (adaptation to local needs). Both approaches have advantages and disadvantages over the other, which I will discuss here.
Factors in Favor of Standardization
Normally holds, the larger the quantities produced, the lower the costs per unit. Simply due to the quantity and the learning-curve-effect, standardized products can result in lower costs and larger economies of scale in the different activities from production to sales.
Further, the more equal the markets are, the easier the management of the internationalization process is, and the easier it is to use identical marketing in different countries. On the other hand, sales often depend on local tastes and needs (and sometimes there are legal requirements), and therefore the on-size-fits-it-all approach is not universally possible.
In practice the company needs to find the right point in the middle. A different option is a platform strategy that makes sure that as few parts of the product as possible are adapted to local needs.
Terpstra/ Sarathy (2002) name the following additional factors, which favor standardization:
- High costs of adaptation: High costs of production can make it difficult to sell the product at a reasonable price in low volume markets. In these cases standardization allows larger economies of scales, resulting in less costs per unit.
- Industrial products: Industrial goods tend to be more standardized than the more people centric consumer goods, as they normally adhere to technical principles, which are valid internationally.
- Convergence and similar tastes: Consumer patterns among countries with identical income levels tend to converge, and thus products for markets with differing income levels will more likely be different. The choice of target markets partially predefines which standardization level is possible.
- Predominant use in urban environments: Urban environments tend to be similar accross countries, and it is possible to standardize if the usage of the product can be limited to urban users.
- Marketing to similar countries: Depending on characteristics of the particular products, it is possible to identify markets with similar characteristics in terms of sales. It is possible to standardize, when it is possible to identify clusters of similar markets.
- Centralized management and operating with exports: If a firm operates internationally as an exporter is more likely that this firm favors to work with standardized products.
- Country-of-origin effects: Products might actively retain their home market focus. The firm might use these attributes strategically and it migh use these characteristics actively as a buying argument.
- Economies of scale in production: The firm can gain economies of scale in production when standardizing the products.
- Economies of scale in research and development: It the firm uses the same product design globally, it is possible to achieve economies of scale in R&D.
- Economies in marketing: Economies of scale are possible, if it is possible to use an identical marketing approach globally.
The Factors in Favor of Adaptation
If the adapted product meets the needs local market demands better, the customers abroad are often willing to pay a higher price. Thus, adapted products might in general yield a higher profit per unit sold.
As mentioned before, sometimes adaptations are not just marketing-driven, but simply they are legally needed, and are therefore the prerequisite to market entry. Terpstra/ Sarathy (2002) name the following additional factors, which favor adaptation:
- Differences in technical standards might make it necessary to adapt the product to local needs.
- Needs of local customers: Consumer and personal use products will more exactly meet the needs of the local market, when adapted.
- Variation in consumer needs and differing use conditions: Use conditions in the different markets may differ, so that it might be required to adapt the product to local needs.
- Differing income levels: The per capita income level vary greatly among the different countries worldwide. It might be required to adapt certain product specifics to local needs, and to allow customer segments to buy it, which are different to those at home.
- Fragmented independent national subsidiaries: Depending on the globalization strategy, companies might have largely independent national subsidiaries, which are active in their respective markets for a long time. These subsidiaries might produce adapted products, and can, or will sometimes not follow new efforts to standardize the products globally. It is also possible that national subsidiaries demand from their headquarters local products that allow them to reach given profit targets.
- Cultural differences: Cultural differences might affect different buying criteria. It is thus often necessary to adapt a product to local tastes and habits.
- Environmentally induced adaptation: Governments might forbid or favor product characteristics, which are allowed in the home country. It is possible also, that they impose local content requirements (in these cases a certain portion of the product needs to be produced locally) to foreign companies.
- Corporate strategy and competition: The firms needs to consider examples of successful companies, and they need to understand, what these firms did, and how their success was related to the different strategic choices.
Principles for Product Adaptation
Assuming that you studied your target markets in sufficient depth, and is clarified how standardized or adapted the product can and should be. Also assuming that you evaluated if a platform strategy could help you, keep a least parts of the product standardized. Then the next question is, how and where you adapt the product.
Terpstra/ Sarathy (2002) summarize the variables that foster product adaptation as follows (in declining importance in the industry):
(i) The criteria variations in customer needs, conditions of use and ability to buy are among the most important reasons to choose an adaption strategy. These factors guide the adaptation of attributes and features of the basic product, or of areas, such as packaging.
(ii) In most cases different technical standards, and different user languages require that particular product characteristics are altered.
(iii) It is then often required to follow competitors, which already offer adapted products.
(iv) If adaptation costs are low, it is likely that adaptation takes place. Products with high R&D effort will thus often not be adapted to local needs.
(v) Local production parameters, and available material requires local production with changes in design or process.
(vi) In many cases government regulations force companies to make a localized product available.
(vii) Cultural preferences require certain adaptations.
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