Assessing the lead market potential of countries for innovation projects

Abstract

This paper presents an approach to assessing the potential of countries to lead the global adoption of an innovation and to set a global product or process standard. It can be observed that the specific design of an innovation diffuses worldwide after it has been adopted in a single country. We suggest that there are nation-specific characteristics that increase the likelihood that a locally preferred innovation design will become successful in other countries, too. Once users in a market that has lead market characteristics have adopted a specific innovation design, the possibility increases that users in other countries subsequently adopt it as well. We present a lead market concept for the development of global innovation designs. By focusing on the design of the innovation that responds to the preferences within the lead market, a company can leverage the success experienced in the lead market for a global market launch. In order to follow a lead market strategy of new product development, it is necessary to assess the lead market potential of countries before an innovation is developed and tested in the market. We use an indicator-based methodology that approximates the lead market attributes of countries. The assessment methodology is applied to two innovation projects at the truck division of DaimlerChrysler.

Introduction

When Siemens, a large electrical machinery and office equipment manufacturer headquartered in Germany, analysed the market opportunity for the new facsimile technology in the 1970s they concluded that neither an introduction in Europe nor in the biggest foreign market, the United States, would be successful. The prototype machines were bulky and they emitted an unpleasant scent; the paper was physically irritating and the quality of the transmitted text was poor. A teletypewriter, the telex system, which was already popular in some local markets, seemed more advantageous. The marketing team of the telecommunications division at Siemens, however, discovered that the facsimile technology would be preferred in Japan because of the pictorial character of its language. At the same time, specific attributes of the Japanese market such as the market size and the competition would make the fax machine more competitive outside of Japan, which would threaten Siemens' global market position in the text-based telecommunications equipment sector. They sensed that once the technological design of text-based telecommunications equipment opens up a mass market in Japan, it would garner the power to spread worldwide and squeeze designs preferred in other countries out of the world market. As a result, the telecommunications division of Siemens did not abandon facsimile technology but introduced a fax machine in Japan. The Japanese affiliate of Siemens was given the responsibility for text communication equipment, which included the task to lead the development and launch of facsimile machines. It turned out that the fax machine was indeed the preferred choice in Japan. As expected, when the mass market emerged in 1985, production costs decreased rapidly due to the economies of scale of production. Lower prices and improved quality made the fax machine increasingly popular in the United States and Europe as well. With the pioneer advantage in Japan, Siemens became the leading producer of fax machines.

As most readers will know, the strategic response of Siemens to the situation in the 1970s described here is fiction. What is true is that at that time Siemens had developed a considerable technological advantage in facsimile technology. Unfortunately, though, it did not carry out an analysis on the lead market potential of countries. Because of low market response from the German market, they abandoned facsimile technology and concentrated R&D activities on improving the telex system. In contrast, sensing local demand for the particular technology, Japanese firms invested continuously in facsimile technology and introduced a stream of improved and more affordable fax machines in Japan and abroad. The Japanese bandwagon spread over to the United States and Europe. The strength of the local markets gave Japanese manufacturers, such as Ricoh and Sharp, a secure competitive cost and technology lead. At the end of the 1980s, Japanese firms controlled nearly 90 % of the world market (Yoffie, 1997, p. 33). Eventually, the facsimile technology even superseded the telex system, which had been the preferred device in Europe and the US.

It can be observed that many innovations are preferred and adopted in a particular country before they are successful in other countries as well. The countries in which the diffusion process of an innovation first takes off have been called ‘lead markets’ (e.g. Kalish et al., 1995, Kotabe and Helsen, 1998). The strategic importance of these countries had been first suggested by Porter (1986) and has been discussed by Gerybadze et al. (1997), Johansson (2000) and Bartlett and Ghoshal (1990). Bartlett and Ghoshal (1990) describe those first markets as “the markets that provide the stimuli for most global products and processes of a multinational company” (p. 243). Other authors have used the term ‘lead market’ to denote the country in which an innovation was invented (Yip, 1992), in which the subsidiary of a multinational company takes over global product responsibility, for instance as global coordinator of marketing activities (Raffée and Kreutzer, 1989), or as a mixture of all (Jeannet, 1986).

We define lead markets as regional markets with specific attributes that increase the probability that a locally preferred innovation design becomes internationally successful as well.¹ An innovation design, as defined by Utterback (1994), is a specification or configuration of an innovation idea. Different designs of an innovation have the same basic function but different specifications or a different mix of attributes such as size, quality, performance, precision, technology, energy consumption, etc. Different designs are characterised as alternatives for the same need or function and, therefore, compete against each other on the world market. For instance, the fax machine is an innovation design of a communication device transmitting written information. An IBM and an Apple computer are different designs of a personal computer.

After studying many globally successful innovations, such as cellular mobile telephony, the fax machine, personal computer and others, we argue that in order to contribute to the strategic innovation management of a firm, lead markets should be defined solely by the market-context factors of countries and not by firm-specific factors or scientific technological knowledge endowments of countries. For most global innovations we analysed, the international competitiveness of firms derived from the fact that they responded to a local market whose attributes made the particular innovation internationally successful. There rarely was originally a significant general scientific–technological knowledge gap among firms in the US, Europe and Japan. If a knowledge gap existed, firms that perceived a stronger local market demand than firms in other countries were able to close it quickly or the gap concerned technological nuances that often result from different local conditions and preferences.

The concept of a technology gap as a competitive advantage of a firm is often inadequate in another respect. The benefit of a technology is not the same everywhere; it is commonly environment-specific. For example, the perfection of an air conditioning system in a car is of little interest to users in countries with a mild climate. The technical specification of a mobile telephone system that has to be used in a densely populated city would be very different from a mobile system for sparsely populated countries. A firm normally uses its own technological capacity and acquires technology from outside to match local conditions. If the home market has the characteristics of a lead market, local firms have a home market advantage (Linder, 1961). Indeed, most firms became internationally successful because they just happened to be located in a lead market. Most firms are biased towards their home market environment even if they plan to create global innovations. Home market conditions such as demand preferences, environmental conditions, the social structure and a competitive climate shape a firm's innovations. This causes new products and processes to be culture specific. For instance, the personal computer has been described as a response to the call for independence by the individualistic American society (Ceruzzi, 1999). Local infrastructure and complementary goods or the lack thereof influence the design of a product; the creativity of engineers is stimulated by their own living context while market knowledge is perceived and acquired most conveniently from the home market with information from foreign markets being less weighted or understood than information from the home market.

However, lead market countries are also a chance for firms outside the lead market to develop global innovations. Instead of pursuing the “best” technology, it is necessary for an international firm to analyse the ability of countries to anticipate globally beneficial innovations. By concentrating attention and resources on the lead market country, a firm can increase the chances of an innovation becoming internationally successful. At the same time, focusing on a narrow range of market preferences and feedback, a firm can lower the market research costs as well as speed up the process of innovation development. In responding to the market context of the lead market, it can avoid nationally idiosyncratic innovation designs. In contrast, firms that do not respond to lead markets run the risk that their innovation designs are eventually squeezed out of the local market by innovation designs adopted in the lead market.

In this article, we present a method of assessing the potential of countries to leverage a national innovation success internationally. The lead market analysis suggested here aims at assessing the lead market potential of countries for a specific innovation project. After retrieving that information, the firm can decide on how to respond to the lead market potential of a foreign country according to its own firm-specific capabilities and global resource allocation. We first review the different mechanisms that can be responsible for the international diffusion of an innovation design that is first adopted in a single country and the emergence of a globally dominant design. We argue that several country-specific characteristics exist that increase the probability that a design preferred domestically becomes the globally dominant design. These attributes are arranged in a set of five groups, the lead market factors. To identify potential lead markets, we have developed a concept of lead markets that focuses on quantifying lead market factors. In the second stage, we report on the procedure and the results of a real application of our methods to estimate the potential lead market role of countries for two innovation projects of the truck division of DaimlerChrysler.