This study employs the resource-based view to understand how product strategy influence export performance. According to the organizational learning perspective, moreover, the ability to manage existing assets and capabilities and the development of new capabilities are arguably among the most relevant innovation success factors. Based on these theoretical backgrounds, a model is proposed to analyze the effects of cost leadership and differentiation strategy on export performance, as well as the moderating effects of exploitative and exploratory innovation capability. Using survey data from Korean exporters, the findings indicate that the cost leadership and differentiation strategy enhance export performance. While exploitative innovation capability strengthens the relationship between cost leadership strategy and export performance, exploratory innovation capability enhances the link between differentiation strategy and export performance.
Introduction
The trade-off between cost leadership strategy and differentiation strategy is of importance and presents a key challenge to exporters because it is intrinsically related to innovation (Gebauer, 2008; O’Cass et al., 2014). Nevertheless, resources are limited, and firms must make choices in their allocation and determine the extent to which they will emphasize one strategy over another (Danneels, 2007; Lant, Milliken, & Batra, 1992). Although the individual roles of product strategies or innovation capabilities on export performance have attracted considerable attention (e.g., Hortinha, Lages, & Lages, 2011; Lages, Silva, & Styles, 2009; Molina-Castillo, Jimenez-Jimenez, & Munuera-Aleman, 2011), few studies have assessed their integrating impact - that is, the difference in the strengths of the relationships between cost leadership or differentiation strategy and innovation. Drawing on resource based view, we examine how innovation capabilities related with the relationship between cost leadership and differentiation strategies and exporters’ performance. Thus, we consider the moderating role of two distinct capabilities - exploratory innovation and exploitative innovation - on the relationships between product strategies and export performance. Exploratory innovation includes activities aimed to enter new product-market domains, while exploitative innovation activities improve existing product-market domains (He &Wong, 2004).
The objectives of this study are to explore (1) impacts of cost leadership strategy and differentiation strategy on export performance, (2) moderating effects of exploitative and exploratory innovation capability on the relationship between product strategy and export performance, and (3) these relationships in the context of Korean exporters. The Korean exporting firms are more concentrated on international markets because of limited size of domestic market (Nugent & Yhee, 2002). These characteristics of Korean exporters are more useful to examine the effect of product strategy and product innovation capability of firms on export performance in international markets.
Conceptual Background
Product Strategy and Competitive Advantage
Porter (1980) argues that a firm can achieve a higher level of performance over a rival in one of two ways: either it can supply an identical product or service at a lower cost, or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation. A cost leadership strategy is designed to produce goods or services more cheaply than competitors by stressing efficient scale of operation. When a firm designs, produces, and sells a comparable product more efficiently than its competitors as well as its market scope is industry-wide, it means that the firm is carrying out the cost leadership strategy successfully (Campbell-Hunt, 2000). Thus, the primary thing for a firm seeking competitively valuable way by reducing cost is to concentrate on maintaining efficiency through all activities in order to effectively control every expense and find new sources of potential cost reduction (Dess & Davis, 1984). The differentiation strategy provides value to customers with the unique attributes or perceptions of uniqueness, and characteristics of a firm’s product other than cost. The firm pursuing differentiation seeks to be unique in its industry along some dimension that is valued by customers, which means investing in product R&D and marketing (Porter, 1980). Rather than cost reduction, a firm using the differentiation needs to concentrate on investing in and developing such things that are distinguishable and customers will perceive (Gebauer, 2008). Overall, the essential success factor of differentiation in terms of strategy implementation is to develop and maintain innovativeness, creativeness, and organizational learning within a firm (Dess & Davis, 1984; O’Cass et al., 2014; Porter, 1985).
Innovation Capability in International Markets
A firm’s ability to compete in the long term may lie in its ability to integrate product strategy and its existing capabilities, while at the same time developing fundamentally new ones (Lavie & Rosenkopf, 2006). Simultaneous investments in the exploitation of existing product innovation capabilities and the exploration of new ones may help create a competitive advantage (Soosay & Hyland, 2008). Organizational learning represents the development of knowledge that influences behavioral changes and leads to enhanced performance (Crossan, Lane, & White, 1999; Fiol & Lyles, 1985). Product innovation is a tool for organizational learning and, thus, a primary means of achieving its strategic renewal (Danneels, 2002; Dougherty, 1992; O’Cass et al., 2014). Exploration pertains more to new knowledge - such as the search for new products, ideas, markets, or relationships; experimentation; risk taking; and discovery - while exploitation pertains more to using the existing knowledge and refining what already exists; it includes adaptation, efficiency, and execution (March, 1991). Exploration and exploitation compete for the same resources and efforts in the firm. With a focus on exploring potentially valuable future opportunities, the firm decreases activities linked to improving existing competences (Levinthal & March, 1993; March, 1991). In contrast, with a focus on exploiting existing products and processes, the firm reduces development of new opportunities. However, firms must develop both exploratory and exploitative capabilities because returns from exploration are uncertain, often negative, and attained over the long run, while exploitation generates more positive, proximate, and predictable returns (Levinthal & March, 1993; March, 1991; Özsomer & Gençtürk, 2003). Researchers have shown that both types of learning are essential to enhancing firm performance (Leonard-Barton, 1992; March, 1991). In this study, we use exploration and exploitation to describe two innovation-related capabilities that are critical elements on the relationship between product strategies and export performance.
International markets are turbulent and diverse with respect to customer needs, cultures, and competitiveness; therefore, innovation assumes a primary role (Kleinschmidt, De Brentani, & Salomo, 2007). Firms can leverage their innovations by securing business opportunities in those markets and thus increase their innovative capabilities (Knight & Cavusgil, 2004). Through exploratory innovation, firms develop new competences and thus enhance superior export performance by product strategies (Teece, Pisano, & Shuen, 1997). Exploitation activities are also important to exporters because they facilitate the lower-risk extension of export operations. By searching for solutions in the existent competence base, exploitative innovation increases efficiency and productivity. Accordingly, this study based on organizational learning perspective to support the idea that innovation capabilities are a vehicle for a product strategy, and achieving superior export performance. We advance the literature by allowing for a role of product strategies while also considering moderating effects of innovation capabilities. Moreover, we provide insights into how choices about emphasizing one product strategy over another relates the balance between exploration and exploitation.
Hypotheses
Product Strategy and Export Performance
Porter’s cost leadership and differentiation strategies have been linked to the achievement of superior performance by many studies (Campbell-Hunt, 2000; Dess & Davis, 1984). A firm that successfully pursues a cost leadership strategy emphasizes “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on” (Porter, 1980: 35). A firm can, therefore, gain a competitive advantage over its rivals by having significantly lower cost structures in an industry without ignoring other areas such as product and service quality (Amoako-Gyampah & Acquaah, 2008). Thus, the maintenance of a strong competitive position for an organization pursuing a cost leadership strategy places a premium on efficiency of operations and scale economies that enable them to achieve and sustain their performance for a considerable period of time. In addition, with a cost leadership strategy, firms focus on reducing costs through operational efficiency. For example, they might exploit existing facilities and learn how to reduce costs through automation, modernization, capacity utilization, or economies of scale. Efficiency, control, planning, and variance reduction represent the key elements of a cost leadership strategy, and a typical example of a cost leadership strategy involves the implementation of an experience curve, on which cumulative production determines reductions in unit production costs. Firms engage in economies of scale and/or scope when they apply their knowledge and facilities from existing product lines to product line extensions. The associated positional advantage is a cost advantage pertaining to the firms’ value offering and is based on the product’s price–perceived value proposition in the export market.
Hypothesis 1: Cost leadership strategy is positively associated with export performance.
A firm that pursues a differentiation strategy may attempt to create a unique image in the minds of customers that its products are superior to those of its competitors (Miller, 1988). A firm creates these perceptions through advertising programs, marketing techniques and methods, and charging premium prices. Moreover, a firm may pursue a differentiation strategy by creating a perception in the minds of customers that its products possess characteristics that are unique from those of its competitors in terms of differences in design, physical attributes/features, and durability (Gebauer, 2008). Differentiation strategy aims to generate more outwardly focused product innovations that offer customers product differences that shape a distinctive value offering that is more responsive to their needs (Hughes, Martin, Morgan, & Robson, 2010; O’Cass et al., 2014). The associated positional advantage is a product or market differentiation advantage pertaining to the superior brand, quality, design, and product features that differentiate the firms’ value proposition from its competitors in the export market.
Hypothesis 2: Differentiation strategy is positively associated with export performance.
Moderating Effects of Innovation Capability
From the generation of new ideas through to the launch of a new product, exploration and exploitation play a vital role in product innovation (Rothaermel & Deeds, 2004). Organizations can decide to use existing organizational competences to realize short-term results, or create new competences that may foster the development of innovations in the longer term (Atuahene-Gima, 2005). Both types of capabilities are considered to be dynamic in nature (Winter, 2003), given that their purpose is to transform existing resources into new functional competences that provide a better match for the firm's environment (Voss, Sirdeshmukh, & Voss, 2008). Although both exploitative and exploratory capabilities related to cost leadership and differentiation strategies, because of those different roles of capabilities in innovation process, the effects of those innovation capabilities on the relationship between product strategy and export performance might be different. In case of cost leadership strategy, firms focus on using and developing existing capabilities, promoting improvements in existing components and building on existing technological elements (Benner & Tushman, 2003; Rust et al., 2002). Similarly, exploitative innovation is aimed at improving existing product-market domains. The cost leadership strategy creates value through existing competences or competences that have been slightly modified (Voss et al., 2008). It promotes a routine-based and repetitive approach to organizational changes (Rust et al., 2002). Because exploitative innovation builds on existing knowledge and extends existing products and services for existing customers (Soosay & Hyland, 2008), exploitative capabilities helps firms pursuing cost leadership strategy to reap the benefits of improvement they make to their products and to continue making incremental improvements (Brucks, Zeithaml, & Naylor, 2000), which are designed to allow the firm to continue its superior performance (Griffin, 1997).
Hypothesis 3: Exploitative innovation capability moderates the relationship between cost leadership strategy and export performance positively.
Compared to cost leadership strategy, differentiation strategy is characterized by radical change, risk and experimentation and that allows for the creation of new methods, relationships, and products. Because exploration focuses mainly on trying to create variety, to adapt and hence exploit ever-decreasing windows of opportunity (Soosay & Hyland, 2008), this capability is more beneficial to the kind of product innovativeness to the firm (Augusto & Coelho, 2009). When exporters pursue differentiation strategy for acquiring new knowledge and developing new products and services, exploratory capability helps to engage new insight into the design of new features and benefits of a given product, that product is guaranteed to contain new ideas (Cho & Pucik, 2005; Yalcinkaya et al., 2007). In contrast with exploitation aimed at improving existing product-market domains, explorative innovation requires fundamental changes in the way an organization operates and represents a clear departure from existing practices (Menguc &Auh, 2006).
Hypothesis 4: Exploratory innovation capability moderates the relationship between differentiation strategy and export performance positively.
Discussion
Focusing on product strategy through the application of the RBV has provided theoretical insights as well as empirical evidence as to which capabilities are required to achieve these critical product strategy outcomes. The support from this study provides further evidence of the usefulness of applying the RBV to the export setting and should encourage researchers to examine the other aspects of export strategy. Based on organizational learning perspective, in addition, this study found that exploratory and exploitative innovation capability are essential to the firm because they act as vehicles for renewing product strategy to achieve superior export performance. By considering product strategy with exploration and exploitation simultaneously, we present a new perspective of the roles of these product strategies in the development of firms’ innovation capabilities. Our results indicate that cost leadership and differentiation strategy are pivotal in ensuring a proper balance between exploratory and exploitative innovations.
One of the main implications for managers is that both exploratory and exploitative product competences should consider in parallel when developing product strategy. The findings underscore the need for managers to invest in cost leadership and differentiation strategy to ensure the development of exploration and exploitation. Therefore, resource allocation decisions should, consider the firm's needs for innovation capabilities and, on the other hand, be guided by the firm’s product strategy. Exporters operate in highly complex environments, characterized by high levels of technological and market uncertainties and highly diverse and dispersed customers (Kleinschmidt et al., 2007; Mohr & Sarin, 2009). Therefore, in addition to the product strategy toward the development of innovations using state-of-the-art technologies, managers of these firms need a similarly strong focus on understanding both current and potential exporting markets. By acknowledging the need for product strategy, managers can ensure the balanced innovation capabilities.
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