Product Strategy in Indian Market; Comparative Analysis of Korean and Japanese

Multinational Companies

Heejin KIMPh.D. Candidate of Business Management

Graduate School of EconomicsThe University of Tokyo

Research Interest

Can you see this

key hole?

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Multinational Companies’(MNCs) Product (Development) Strategy satisfying the needs of local customers.

・Should MNCs localize their product development function to their target market? Or, can they manage the globally various needs while concentrating PD on their headquarter?・If they localize PD, what processes and organizational changes are required? And what are the difficulties and outcomes?・In both cases, how the headquarter of a MNC and local subsidiary build their division of labor? And, how can they effectively transfer local market needs to their R&D?

This presentation is about…・MNCs competition in electronic industry of India, focusing on

their product strategy.

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I. Indian Market and MNCs

• MNCs in India• Korean and Japanese electronic firms: history of their competition in India• Product strategy

II. Academic Discussions

• International Business :Evolution of Multinational Companies• Globalization of R&D: findings and limits• Global product development: new approaches

III. Case Studies

• LG Electronics India, Pvt. Ltd.• Sony India Pvt. Ltd.

IV. Conclusion

• Implications of the case studies• Future research plan

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I. INDIAN MARKET AND MNCS

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1. Multinational Companies in India2. Korean and Japanese Electronics Firms3. Product Strategy

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* Source:A.T.Kearney, 2005

1. Multinational Companies in India

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1. Multinational Companies in India

Financial year-wise FDI inflows data (Amount US$ Million)

Financial Years Total FDI Inflow Percentage growth over previous year

2000-01 4,029

2001-02 6,130 (+)52%

2002-03 5,035 (-)18%

2003-04 4,322 (-)14%

2004-05 6,051 (+)40%

2005-06 8,961 (+)48%

2006-07 22,826 (+)146%

2007-08 34,853 (+)53%

2008-09 35,180 (+)1%

2009-10 37,182 (+)6%

2010-11(Up to Aug.) 11,390

Cumulative Total 175,941

* Source: Face Sheet on FDI, Ministry of Commerce and Industry, India (2010.8)

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1. Multinational Companies in India

Statement on sector-wise FDI Inflows (Amount US$ Million)

No. Sector Amount of FDI Inflow

Percentage with total inflows

1 Service Sector 24,861.64 20.86

2 Computer Software and Hardware 10,330.47 8.67

3 Telecommunications 9,985.00 8.38

4 Housing & Real Estate 8,895.49 7.46

5 Construction Activities 8,347.39 7.00

6 Power 5,304.71 4.45

7 Automobile Industry 4,709.70 3.95

8 Metallurgical Industry 3,742.74 3.14

9 Petroleum & Natural Gas 2,883.37 2.42

10 Chemical 2,641.99 2.22

11 Trading 2,459.87 2.06

12 Electrical Equipment 2,183.52 1.83

* Source: Face Sheet on FDI, Ministry of Commerce and Industry, India (2010.8)

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1. Multinational Companies in India

West

South

East

North

Examples of MNCs

*Source: KOTRA(Korea Trade-Investment Promotion Agency) 2010

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2. Korean and Japanese electronic firms

１９８０s １９９０s １９９５～ ２０００s ２００５～ ２０１０ｓ

Major

Economic

Policy

Korean

Firms

Japanese

Firms

Comm-unist

RegimePartial Liberalization of Economy Abolition of

Protectionism

JV with BPL

*Source: web pages of each company

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2. Korean and Japanese electronic firms

Ranking

Refrigerator Washing Machine Air-conditioner Color TV

Company MS Company MS Company MS Company MS

1 LG 29.4 LG 30.6 LG 32.0 LG 26.2

2 Whirlpool 24.9 Samsung 16.4 Samsung 20.6 Samsung 17.1

3 Samsung 17.2 Whirlpool 15.9 Voltas 9/0 Sony 10.3

4 Videocon 6.0 Videocon 9.6 Videocon 6.5 Onida 8.9

5 Electrolux 5.1 Onida 4.6 Onida 5.4 Videocon 7.0

6 Haier 1.0 Electrolux 2.9 Electrolux 4.6 Philips 6.3

7 Voltas 0.5 Haier 1.0 Hitachi 2.9 Sharp 1.4

8 - - - - Haier 0.8 Panasonic 0.8

Market Share of Major Consumer Electronics (2006)

* source: Chindia Journal 2008.1

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2. Korean and Japanese electronic firms

Changes of Market Share / Color TV （2000-2004, India）

*Source: http://www.businessworld.in/sep2004/news13.asp

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2. Korean and Japanese electronic firms

Marketing

Distribution Networks

Localized Product

Etc, etc.

LG and Samsung’s success factors are…

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3. Product Strategy

* Some product Localization Efforts

Cricket GameInto TV set, caption of 15 local

languages, Strengthened Speaker

Sari-washing courseAuto-cooking of more than 100 Indian Dishes

Key-holeCool-pack

More space for Vegetables

Crest Guru:Solar energy –

chargeable mobile phone

15Heejin KIM, Tokyo University2010/11/25＊Source:http://www.businessworld.in/index.php?option=com_content&task=view&id=1123&Itemid=1179

3. Product Strategy

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Until very recently, most of Japanese makers compete with global models in India.

3. Product Strategy

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To sum up this chapter…

1. As one of the biggest market in the world, India attracts many MNCs, and their competition is getting intense.

2.Concerning Korean and Japanese electronic companies, LG and Samsung show superior market performance even though they are late comers.

3. Focusing on their product strategy, it gets obvious that Korean makers take product adaptation strategy while Japanese counterparts pursue global product strategy.

II. ACADEMIC DISCUSSIONS

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1. Theories explaining FDI2. Globalization of R&D3. Localization of Product Development

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1. Theories explaining Foreign Direct Investment

Hymer(1960,1976)

[Ownership Advantage]The primary advantage that a firm bring to foreign markets is its possession of superior knowledge.

Caves(1971)

The bond between FDI and the transfer of firm-specific knowledge was first made explicit in Caves’ article. Johnson(1970)

McManus(1972)Magee(1977)

・Knowledge as public good (it can be transferred at zero marginal cost)・market for the sale of this knowledge isimperfect

BuckleyandCasson(1976)

[Theory of Internalization]Because of the public character of knowledge, which results in the two critical properties of being easily transferred and hard to protect, firms operate a network of plants on a worldwide basis.

Vernon(1966,1971)

Product lifecycle Theory

Dunning(1981,1993)

Eclectic Paradigm

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Rugman(1980)

MNCs arises due to the internalization of the failure of the market for information.

Teece(1977),(1983)

Technology is not a public good!He analyzed 27 projects to find that he cost of transfer to range from 2 to 59% of total costs .(Transfer experience and recipient capability matter)

Hennart(1988)

Expands the notion of Tacit knowledge to explain internalization.

Kogutand Zander(1993)

・The MNC arises not out of the failure of markets for buying and selling of knowledge, but out of its superior efficiency as an organizational vehicle by which to transfer this knowledge across borders.・They empirically shows that the less codifiable and the harder to teach is the technology, the more likely transfer will be wholly owned operations.(not licensing or JV)

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1. Theories explaining Foreign Direct Investment

Global Integration

Local Responsiveness

Research

Development

Manufacturing

Marketing

Sales

* Source: Bartlett and Ghoshal (1989)

I-R GridShowing each functions’ positional differences

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Year USA Canada France Germany Italy Japan U.K.

1981 6.2 7.4 7.2 1.2 4.3 0.1 8.7

1982 6.5 10.7 4.8 1.3 4.7 0.1 NA

1983 6.5 16.7 4.6 1.4 4.3 0.1 6.8

1984 6.5 17.2 6.5 1.5 6.2 0.1 NA

1985 6.5 14.3 6.9 1.4 6.1 0.1 11.1

1986 6.8 13.7 8.0 1.4 7.3 0.1 12.2

1987 7.3 16.9 8.7 1.5 6.9 0.1 12.0

1988 8.2 18.1 9.2 2.1 6.6 0.1 12.0

1989 9.5 116.9 10.9 2.7 6.5 0.1 13.4

1990 11.1 17.7 11.1 3.0 7.3 0.1 15.5

1991 NA 17.7 NA 3.1 5.1 0.1 16.0

Percentage of R&D financed from foreign sources, selected countries, 1981-1991

*Source: National Science Board, Science and Engineering Indicators, US Government Printing Office, Washington, D.C., 1993

2. Globalization of R&D

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*Sources: 1. Dunning (1994), 2. Gates (1995), 3. Roberts (1995),4. Patel (1995), 5. Buderi et al. (1991), 6. National Science Board (1991), 7. Kumar (1995), 8. OECD (1996). （Zedtwitz and Gassmann, 2002)

Increase of R&D Internationalization in Europe, US, and Japan

2. Globalization of R&D

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2. Globalization of R&D

Category Papers Main Issues

Trend of global R&D

Granstrand, Hakanson and Sjolander(1993) A.Garybadze and G. Reger(1999)Niosi (1999)

・Many researches point out( and empirically investigate) that globalization of R&D is obvious trend worldwide.

Purpose and motivation of global R&D

Cheng and Bolon(1993)Hakanson and Nobel(1993)Odagiri and Yasuda(1996)Florida(1997)Kuemmerle(1997)

・To explore local knowledge resources and to exploit home bases’ technology. To support local manufacturing facilities

Role and type of overseas R&D units

Ronstadt(1977)Pearce(1989)Hakanson and Nobel(1993)Nobel and Birkinshaw(1998) Niosi (1999)

・Local adaptor, international adaptor, international creator・Transfer technology units, indigenous technology units, global product units, corporate technology units

Organization and coordination of overseas R&D units

Nobel and Birkinshaw(1998)Reger(1999)Chiesa(1996)Gassmann and Zedtwitz(1999)Asakawa(2001)Ambos and Schlegelmilch(2004)

・control mode and communication systems among R&D units・organizational tension arises among HQ and overseas R&D units

Location of overseas R&D units

Kenny and Florida(1994)A.Garybadze and G. Reger(1999)Kuemmerle(1999)Zedtwitz and Gassmann(2002) Sugiyama(2003)

・Basic research unit locate flexibly while factory supporting development unit locate close to the manufacturing site.・Concentration of research units in Europe, Japan, America・Globally, R is concentrated while D is dispersed.

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3. Localization of product development

Advantages and disadvantages of product development localization

Advantages Disadvantages

Communication and Coordination Cost

Technology spillover/property right

Economies of Scale

Proximity to manufacturing

facilities

Proximity to Customers

Rich engineering resources

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Product Standardization Product Adaption

Pros ・The Triad(U.S., Western Europe, and Japan) constitutes the major markets, accounting for the bulk of world market potential. Consumers in these markets have become fairly homogenous, making standardization feasible. (Ohmae 1985)

・Marketing program is largely a local issue and the best course of action for a product ought to differ from market to market(Buzzell 1968; Hill and Still1984, Wind1986)・Customs and traditions tend to persist

(Fournis 1962)

Cons ・Introduction of new global brands may well cannibalize the existing brands(Douglas and Wind 1987)

・Adaptation philosophy has been mainly an outcome of lack of vision on the part of multinational companies. For this reason, such companies are likely to disappear and be replaced by truly `global corporations`(Levitt 1983)

3. Localization of product development

Product standardization/adaptation controversy

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3. Localization of product development

・Should MNCs localize their product development function to their target market?To answer this question, micro-level organizational analysis is required.

Target market

identification

Need identificat

ion

Idea generation

Concept developm

ent and selection

Specification development

Detailed engineering

Pilot testing

Pilot production

Production starts-up

✔To which extent of these activities, a local subsidiary is in charge?✔ How the local subsidiary transfer their information(knowledge) effectively to HQ(home country)?✔ How HQ integrates the multi-source knowledge and embodies that into a successful new products?

Ex. Product development process

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To sum up this chapter…

1. Theories explaining FDI by multinational companies have been developed since 1960s, giving high attention to global R&D recently.

2. R&D globalization is obvious phenomenon in many industries, and in many countries, which encourages rich discussions in academics. However, most of the existing global R&D literatures focus on the trend itself or classification. Also, in most cases, their analytical unit is ‘R&D’ itself, which is too big to draw out practical implications to companies.

3. Here, to analyze localization of product development , well-balanced perspectives are necessary. In addition, transfer and integration of knowledge among sub-activities of product development processes should be carefully investigated to provide meaningful understanding.

3. CASE STUDY

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1. LG Electronics India Pvt., Ltd.2. Sony India Pvt., Ltd.

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1. LG Electronics India Pvt. Ltd.

Year Event

1997.2 LEGIL establishment (100% green field investment)

1997.5 Launched Refrigerator, washing-machine, CTV

1997.7 Plant building started(Noida)

1997.9 Open 18 LG shops

1998.1 Launched A/C

1998.4 Started Production at Noida

1999.3 Started MWO(Microwave Oven) Production

1999.12 ISO 9002, ISO 1402 certificated

2003.3 Started Compressor Production

2004. 10 Inaugurated the Pune Plant

✤History

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*Source: web-pages of LEGIL(www.lge.com/in)

1. LG Electronics India Pvt. Ltd.

Function Noida Pune

FSE(Korean Advisors)

17 4

Finance&Administration

224 22

Human Resources 56 18

Sales & Marketing 632 19

Consumer Service 214 09

R&D 145 67

Manufacturing 336 84

Shop Floor 782 152

Total 2760

*Source: LEGIL (2005)

✤Financial Performance ✤Manpower

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• Branch office: 51• RAO (Regional

Assessment office):79• (Total 130)

Company’s reach

• Dealers:1350• Distributors:889• AWD: 130• (Total 2369)

Sales Channel

• ASC, ASP:480• SSD:500• (Total 980)

Service Channel

• Mother warehouse:1• Stock Point:73• (Total 74)

Logistics

✤ LGEIL`s Sales and Service Networks in India

1. LG Electronics India Pvt. Ltd.

ASC: Authorized service centersASP: Authorized service providersSSD: Sales and service dealers

* Source: LEGIL (2005)

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1. LG Electronics India Pvt. Ltd.

✤ LG Brand Shops

“India is a heterogeneous nation, and it is important to have planning and resourcing specifically for each region. We are spread more widely across the country than most local companies that have been in business here for 30 years.”(*Source: LG MD K.R.Kim’s interview with McKinsey)

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1. LG Electronics India Pvt. Ltd.

✤ Product Development Efforts in India

Market Survey

• Pre-marketing survey• Investigating products of competing firms• Analyzing development plans of core parts

Line-up Planning

• Setting product strategy• Drawing unique sales points

Model Development

• Cost Analysis• Localization – Modification decision

Launching

• Customer response monitoring• Solving field claim

TDR Meeting

Managing Director

Sales & Marketing

Plant Manager

R&D

✔Heavy emphasis on detailed market survey to seize customer needs✔ Keeping price premium strengthening differentiated functions

✔ Weekly TDR meeting (Tear Down Reengineering) ✔Realizing concurrent engineering by regular communications among R&D, sales& marketing, and manufacturing.

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“When a competitor firm left for Thailand, for example, we tried to recruit some of its engineers but decided in the end not to hire them. In the ten years those people had been working for that company, we discovered, they had done little to improve the products it was trying to sell to the local market. It turned out that this company’s R&D department back home had been doing most of the work, with only a few modifications carried out here. It’s true that LG imports the basic technology from South Korea, but in India we are responsible for 90 percent of the subsequent R&D work; only 10 percent gets done in South Korea. We spend a billion rupees a year here on research. “(* Source: LG MD K.R. Kim’s interview with McKinsey)

1. LG Electronics India Pvt. Ltd.

✤ Product Development Efforts in India: The ex-MD of LGEIL say…

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New design center opened in Feb. 2010

✤ Product Development Efforts in India: further steps are taken

1. LG Electronics India Pvt. Ltd.

・Extension of industrial design department in LGEIL to independent design center ・Brainstorming, sampling, pilot modeling, and displaying become available in one place, with strong support of IT infrastructure.

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1. LG Electronics India Pvt. Ltd.

✔ LGEIL seems to focus on product localization strategy further strengthening local R&D function.

✔ LG Electronics implemented similar strategy (insight products)in other emerging markets such as Brazil, Russia, China, where LG takes high market share as a result.

✔ Localization of product development is thought as one of the very effective way to transfer and implement local market knowledge to product development process.( But, there are many obstacles and difficulties..)

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✤History

2. Sony India Pvt. Ltd.

Year Event

1994 Set up Sony India (New Delhi)(100% green field investment)

1996 Plant built-assembling started

2004 Close audio plant of Haryana

2005 Close TV plant

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2. Sony India Pvt. Ltd.✤ What happened very recently!

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＊Source:http://www.businessworld.in/index.php?option=com_content&task=view&id=1123&Itemid=1179

✤ Compared to 2006…

2. Sony India Pvt. Ltd.

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2. Sony India Pvt. Ltd.

✤ It surely has a strong brand image!

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✤ Also the highest brand equity! (recent data)

2. Sony India Pvt. Ltd.

*Source: Nielsen(2010)

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2. Sony India Pvt. Ltd.

250 Brand ShopsAcross the Country

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2. Sony India Pvt. Ltd.

✤ Sony’s product development for local market

Is done in Shinagawa Technology Center

MD of

India

MD of

Brazil

MD of

U.S.

Japanese Engineers

✔ Twice a year, there held a product planning meeting in Shinagawa T/C, where managing directors of worldwide subsidiaries are gathered .✔ Various ideas are proposed and discussed by the MDs, and one global design and its features (and sometimes some derived models) are decided. ✔ Japanese engineers do the specification and engineering works to realize the new product.

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2. Sony India Pvt. Ltd.

Monolithic Series (Global Design) Monolithic Series NX500 in India

✤ Sony’s production adaptation in India

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2. Sony India Pvt. Ltd.

✔ Sony seems to focus on global product strategy with minor adjustment to each country. ✔ Thus, its product development function is heavily concentrated to HQ ,while trying to open its communication channels with foreign subsidiaries. ✔ Sony’s case provide a good example of a MNC that has a good market performance without localizing R&D to the market.

IV. CONCLUSION

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1. Implications of the case studies2. Future research plan

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Localized Centralized

Successfulunsuccessful

Market perform

ance of localized products

Product development activities of a MNC

・LG ( India): Home appliance ・Sony ( India): TV

・Panasonic ( China): DVD player

・DENSO ( Korea): Meter Cluster

・DENSO ( India): Wiper System

・Alpine ( China): Car Audio

・Hyundai ( China): Automobile

・Samsung ( India): Home appliance

・Samsung ( China): Mobile phone

・Bosch( Korea): Car Electronics・Delphi ( India): Car Electronics

・LG ( Thailand): Home appliance

・Hitachi ( Thailand): Home appliance

1. Implications of the case studies

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2. Future research plan

✔ Particular interests in transfer and implementation of “Tacit overseas knowledge”

・Tacit knowledge largely ‘indwells’ in the minds of people as perspectives on, or images of, reality (Polanyi, 1966)・Difficulty in codification and transfer is a central attribute of tacit knowledge. (Grant, 1996; Nonaka, 1994; von Hippel, 1994; Zander and Kogut, 1995)・The inherent difficulties in its codification and communication -> key differentiator, and important strategic resource(Conner and Prahalad, 1996)

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✔ Some examples of “Tacit overseas knowledge” (Takeuchi and Porter, 1986)

・Campbell’s canned soups- mostly vegetable and beef combinations packed in extra-large cans-did not catch on in soup-loving Brazil. A post-mortem study showed that most Brazilians housewives felt they were not fulfilling their role if they served soup that they could not call their own. Brazilian housewives had no problems using dehydrated competitive products (such as Knorr and Maggi), however, which they could use as a soup starter but still add their own ingredients and flair.・Johnson & Johnson’s baby powder did not sell well in Japan until its original package was changed to a flat box with a powder puff. Japanese mothers feared that powder would fly around their small homes and enter their spotlessly clean kitchens when sprinkled from the plastic bottle. Powder puffs allowed them to apply powder sparingly.

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Observing consumer behavior

with personal perspectives and interpretations

Sharing observed and interpreted tacit knowledge with

members of project teams

(marketing-R&D linkage)

Implementing the tacit knowledge to

new products(Engineering)

2. Future research plan

✔ Hypothesis:Successful localized products are outcomes of effective processes (of interpreting, transferring, and implementing overseas tacit knowledge), not the automatic result of localizing product development activities.

✔Further field researches and questionnaire survey are being planned.

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