Penn State Smeal Center for Global Business Studies: Articles
'The Evolving Role of Global Business'
Shorter product life cycles dictate new global marketing rules
In the postwar era when the United States dominated the world economy and produced more than half of the world's output, American exporters segmented foreign markets primarily by economic size and chose strategies based on product technology—approaches still widely followed today. The demands of global markets have changed radically since then, said Professor Fariborz Ghadar. Many marketers no longer have the luxury of earning adequate profit at each stage of a product's life cycle. They must apply globally the rules they learned selling around the corner: 'Get to the marketplace quickly, at a reasonable price, and look at profitability from a total life cycle viewpoint.'
Dr. Ghadar, director of Penn State's Center for Global Business Studies, told the conference that the most successful global companies achieve a reputation for providing value throughout the 'international product life cycle.' Shorter product life cycles and more expensive research and development now make these firms attractive strategic partners for emerging technology companies. In turn, the value leaders with marketing clout need to ally themselves with new-technology firms to avoid an otherwise inevitable slide into mature, commoditized markets with cutthroat competition and slim profit margins.
The International Product Life Cycle
A world map reflecting relative purchasing power, Exhibit 1 shown above emphasizes the biggest national markets. The 'Triad' of the largest economies—North America, Japan, and Western Europe—accounts for 70 percent of world production and consumption. The map does not indicate the areas of fastest growth, however: 5 to 15 percent annual rates in developing regions such as Southeast Asia and Latin America. Nor does the map indicate the critical differentiating role played by technology in determining global market strategies.
Life Cycle Stages
From 1963 through 1986, a massive study of global marketing activity—the Harvard Multinational Enterprise Project encompassing 280 U.S., 163 European, 60 Japanese and 58 emerging-nation corporations—found that companies design strategies around their product technologies. High-technology producers behave differently than firms with less advanced wares, Dr. Ghadar explained.
The study revealed a three-stage international product life cycle guiding strategic behavior.
Phase 1—High Tech
At this stage, products have:
- unique, 'leading edge' technologies;
- high engineering content;
- few manufacturers and competitors;
- high gross profit margins;
- manufacturing within the Triad;
- high R&D-to-sales ratios (10 percent or more);
- technically oriented advertising support;
- relatively small markets domestic and export.
Phase 2—Growth and Internationalization
Products at this stage have:
- some standardization with established technologies;
- greater emphasis on process engineering;
- more competitors;
- declining gross profit margins;
- international manufacturing;
- less emphasis on R&D;
- more mass marketing and advertising;
- growing domestic and export markets.
In this stage, products have:
- thorough standardization;
- no emphasis on engineering;
- intense competition;
- this profit margins (a price to cost ratio approaching 1.0);
- manufacturing where factors of production are least expensive;
- no R&D;
- no advertising;
- saturated markets worldwide.
The Harvard study argued that over time, a specific product moves along the life cycle, from phase 1 to phase 2 to phase 3. But companies invest in more R&D to improve their products, refresh their technologies, and push them back toward phase 1.
Marketing can serve the same objective 'by convincing customers that the product is better, through advertising and promotion,' Dr. Ghadar continued. 'Marketing is sometimes more important than product characteristics.'
Global Competitive Positioning
Companies in the 1963-1986 study positioned themselves at various points along the international product life cycle, as shown in Exhibit 2 above. The study identified common patterns of external and internal behavior for each group. Dr. Ghadar pointed out some of the more prominent features of different positioning types:
A companies call themselves 'leading edge' technologists: independent supercomputer companies, for example. They are concentrated in Triad nations. At A companies, 'weird is in' as firms nurture a 'nerd' culture where innovation is worshiped. Employee turnover is high, and A companies hire relatively large proportions of women and minorities, because one's knowledge base is the critical factor in employment. A companies reward technical employees well, often with stock options. As Dr. Ghadar interprets their attitude toward the marketplace, "The nerds say, 'We don't like customers. We want to do research.' At A companies, the customer has to adapt to the company."
B companies portray themselves as leaders in reliable, 'proven' technologies distinct from the risky 'bleeding edge' of the A companies. A prime example: IBM. Executives in B companies speak the language of business and hew to a businesslike culture. 'They look alike, and talk alike, because company culture is very important to impress the customer.' B companies have a tech-driven approach to customers, an arrogance that trades on the power of their brand names. B companies typically have strong sales forces.
C companies promote their mix of performance and price in a 'value' positioning. These firms are the 'gods of marketing' which are winning global markets today, Dr. Ghadar said, by moving quickly into markets with quality products at reasonable prices. The company culture emphasizes being sensitive to host cultures in foreign markets, acting accordingly, and segmenting markets conscientiously. Salaries and benefits tend to be lower for employees compared to A and B companies, however.
D companies, competing on the basis of price with standard products, position themselves as inexpensive—Hyundai automobiles' original positioning of their products in North America, for instance. The D company approach to customers is price-driven. Often, employee benefits are slim, or non-existent when companies move production offshore.
New Pressures in the Nineties
The established international product life cycle positioning is losing its effectiveness in most industries, however. Drastically shorter product life cycles, more expensive R&D, and pressure to outrun changing market tastes are forcing some global business and consumer product manufacturers to adopt a new framework, Dr. Ghadar said.
Even if a firm has a mix of products at different international life cycle stages, it tends to have a single dominant competitive positioning. That can be a problem, Dr. Ghadar pointed out. A firm positioning itself as a B company, for example, does not appear 'weird' enough to sell A products, nor is it 'sensitive' enough to sell C products or 'cheap' enough to sell D products.
To correct the problem, companies create separate business units to market their A, B, C, or D products. And when multiple units call on the same customers, corporations appoint global account managers to coordinate all the activity relating to major customers. A complex set of dotted-line relationships attempts to coordinate the activities of functional, regional, business unit, and global account managers.
An Urge to Partner
The speed of technological change raises problems as well. On average, Dr. Ghadar estimated product life cycles have shrunk from 15-20 years in the postwar era to about three years today. Meanwhile the cost of product development has skyrocketed. Companies must invest in R&D lest they slide toward market maturity, but short life cycles do not permit them to recoup R&D investments unless they have a global position in the marketplace.
In response, A companies pursue alliances with C companies (illustrated by the arcing arrow on Exhibit 2) which have deeper pockets and more marketing muscle. And C companies seek the technical expertise of the A firms, which can keep C products from sinking to D status. Companies in the chemical, computer, telecommunications, and automotive industries, for instance, have developed such partnerships, Dr. Ghadar observed. Lamborghini needed to develop a new state of the art engine, but didn't have the volume to afford its development costs, so it allied with Chrysler which did have the requisite marketing muscle and production volume, and wanted new engine technology.
Historically, companies with technical strengths often faced political risks in foreign countries, Dr. Ghadar added, pointing to instances where nations invited foreign companies to manufacture locally. Once the government partner learned the technology, it nationalized the factory. This threat has become less critical as the expropriated technology life cycle has shortened. Dr. Ghadar contrasted Compaq Computer's willingness to share short-lived personal computer technology with China versus a leading chemical company's reluctance to share advanced cigarette filter manufacturing in that market.
The pressure of short product life cycles and reduced political risk forces firms to move quickly into global markets, selling products at reasonable process, insisted Dr. Ghadar. To win, companies must be first or second in market share. 'If you're number four, you must find a niche where you'll be number one or number two.' Companies might need alliances to acquire the market presence and investment resources demanded by that strategy.
Not all products require that strategy, of course. Those with long development cycles and long life cycles (the upper-right quadrant in Exhibit 3) face less pressure to enter global markets quickly with a reasonable price, Dr. Ghadar reasoned. 'They can behave in the old way: Position yourself as an A, B, C, or D company and act accordingly.'
Of course, the model also applies to components and subsystems, including those of the product categories in the upper-right of Exhibit 3. An aircraft model might be in production for decades, for example, but technological change and competition require shorter life cycle component makers to market new products to aircraft manufacturers quickly, at reasonable prices.
Keys to Success
Global marketing success, Dr. Ghadar summarized, requires global positioning and an integrated organization that moves into markets with speed and flexibility. 'If you can't do it alone, you might need partnerships to do it well and with best-in-class processes. Focus operations on core competencies, be one or two in the market, and benchmark to be sure you're one or two.
'Since C companies are winning out, you must mass customize. The platform can be standardized, but in the marketplace you must meet the customer's needs. The customer wants reasonably-priced new technology around the globe.' The key words, Dr. Ghadar emphasized, are 'new,' 'quick,' 'global,' and 'a good deal.'
Fariborz Ghadar is the William A. Schreyer Chair of Global Management, Policies, and Planning at Penn State, and director of the University's Center for Global Business Studies. He is also chairman of the Intrados/International Management Group, a Washington-based international business strategy and executive development firm. A consultant to a score of major corporations and governments, Dr. Ghadar has written several books, and publishes SWAPS: The Newsletter of New Financial Instruments covering emerging markets. Before joining Penn State, Dr. Ghadar was chairman of the International Business Department at George Washington University. Earlier, he held vice-ministerial posts and was president of Iran's Export Promotion Center.
The Center for Global Business Studies specializes in research in emerging multifunctional business issues that shape the global environment.