Chapter 8: PLAN SECTION 3: PRODUCTS AND SERVICES

CHAPTER 8

Plan Section 3: Products and Services

Everyone lives by selling something. – ROBERT LOUIS STEVENSON

THE GENERAL DISCUSSION OF YOUR COMPANY ’S BACKGROUND and strategic focus described in Chapter 7 should flow nicely into the detailed description and analysis of the products (goods and/or services) of your company. If drafted properly, the portfolio of products will include “solutions” to the competitive opportunities previously identified in the beginning sections of the plan. An international business plan also should address key issues such as adaptation of domestic products to new foreign markets and building a product portfolio for foreign markets that suits the specific characteristics of those countries. Related issues also need to be discussed, particularly the company’s new product development efforts and intellectual property rights.

Description of Products

The business plan should include an extensive description of your company’s principal products in each industry sector where you are active. In addition, you should describe the status of any major new product or industry segment (e.g., whether such products are in the design or planning stage, whether prototypes exist or whether further engineering is necessary). From a formatting perspective, the discussion of existing and new products is usually broken into separate sections, particularly if development work on new products will be financed with funds from investors reviewing the business plan.

The discussion of products in the business plan should extend beyond mere description. It should include an analysis of your company’s key strengths that will make the development, production and sale of products a profitable venture for prospective investors. For example, the discussion should identify any innovative features, potential applications and technological characteristics that may serve as a basis for a particular strategic advantage. This may require an examination of:

■ Revenue, cost and potential markets for the products ■ Distribution channels for the products ■ Assets and resources of the company that are, and will be, needed to support the products in the future

If any weaknesses exist in your company’s products portfolio, such as difficulties in product development for exploitation in a particular market, you should include a description as part of the “risk factors” in the business plan. If a strategy has been developed to remedy such weaknesses, explain it.

The business plan should carefully review your company’s key product development activities, including related milestones and risks. The business plan should take a forward-looking approach, with an emphasis on: ■ New products that the company anticipates developing in response to changing market needs ■ Strategies that the company intends to adopt to meet competitive challenges created by new technologies or scientific approaches that may become practical over the next few years

The current status of each product that your company has under development should be described as part of the business plan. For example, a projected new product may simply be an idea that is still in the conceptual stage, meaning some time will pass before preliminary market testing. In other cases, the company may have developed a prototype, may have commenced small manufacturing runs or have tested the services in a small market release. In such situations, it is appropriate for investors to know about the timetable for completing the development of these more mature products, including the amount of additional cash necessary to achieve full production or provision. Moreover, if a product has been developed to the point of its imminent release into the marketplace, your company probably has already generated at least a marketing plan, and that plan also should be discussed in the business plan.

Product Portfolio

Selection of the optimal portfolio of a product offering is the fundamental strategic factor in marketing. Often, companies introduce their existing products into a market where no comparable product exists. Alternatively, companies might have to determine whether adjustments and modifications are needed for existing products to be successful in the country. Finally, a company might launch a product development effort to create new products that are geared to the local market but not replicated elsewhere in the company’s global product mix. In any case, as discussed in Chapter 4, marketing managers must evaluate all of the relevant demographic, economic, political, regulatory and cultural factors in each new country’s market.

DEMOGRAPHIC FACTORS Although a good deal of emphasis is placed on economic and cultural factors in the preliminary marketing analysis for a new country, demographic factors are just as important. Managers should not simply assume that foreign markets will have the same demographic profile as the company’s home market or neighboring countries. In fact, growth, age and geographic characteristics of each country vary substantially. The impact of demographics is particularly significant in developing countries.

In general, these markets are expanding rapidly, usually youthful and characterized by rapid migration from rural to urban areas. These trends have several consequences for marketing managers. First, higher birth rates mean that average family size is higher and households will more likely have a larger number of persons from several generations. These trends impact how decisions are made

for consumer purchases as well as the size of the typical product package unit. Second, developing countries may have a greater appetite for baby- and childoriented products. Third, rapid urbanization creates opportunities for new products suited to lifestyles in crowded cities and promotional campaigns in large urban markets where they can receive the highest exposure.

ECONOMIC FACTORS Once the demographic characteristics of a new foreign market are understood, consideration must be given to “effective demand” in the country. Demand is influenced by income levels and the allocation of income among the population.

For example, merely because a population is large and growing rapidly does not necessarily mean that the demand for luxury goods will be robust. In fact, most of the population might be struggling to meet the basic needs of life. On the other hand, producers of higher-end goods and services should be mindful of situations in which national income distribution is highly stratified because that country may not have an affluent segment with significant purchasing power. Countries with lower population levels may present more limited market opportunities but potentially greater “disposable” income. Foreign entrants should anticipate faster saturation for export and make preparations for a continuous stream of new complimentary products.

POLITICAL AND REGULATORY FACTORS Political and regulatory factors are important when defining a product portfolio for a new foreign market. Management must review local trade restrictions and foreign exchange requirements. For example, the company may find that it is unable to import certain products or even raw materials, thereby eliminating the product from its offerings or significantly impacting the economics of attempting to produce locally for domestic distribution. Similarly, certain services may be heavily regulated or prohibited. Some manufacturing may be limited to state-owned enterprises or locally controlled companies. In addition, price controls and fluctuating taxation may damage anticipated profit margins.

CULTURAL FACTORS Cultural factors definitely influence consumer values and preferences. Areas most often impacted by cultural factors include those consumer products that must conform to local dietary needs, health practices and religious guidelines.

Management must always be mindful of the restrictions or taboos that might require adjustment in the packaging, advertising or content of a particular product.

STANDARDIZATION VERSUS ADAPTATION Environmental factors aside, companies generally have strong reasons for attempting to standardize their product offerings across multiple foreign markets.

For one thing, standardization creates opportunities for manufacturing economies of scale and competitive pricing. In addition, a standardized product reduces promotional costs in that a similar message can be delivered across the globe (although care must still be taken to be sure that language and cultural differences are factored into the messaging). Finally, use of a preexisting product minimizes

the need for certain pre-launch testing and allows the company to enter a market more quickly.

A standardization policy is more likely to be appropriate as foreign markets become more homogenized and income and educational levels increase. For example, companies that distribute higher-end consumer goods, such as televisions, radios and computers, find that purchasers in more developed countries prefer similar goods despite local technical conditions that may impact the utility of the goods. Pharmaceutical companies also have found that standardizing basic products, such as syringes, is the best way to proceed and usually overcomes all local governmental quality requirements.

However, the lessons from developing countries are very different. Studies indicate that consumer products produced by companies in developed countries often need to be modified to succeed in developing countries. The reason is that many new products for these markets are basic items, such as food and clothing, which necessarily must be tailored to local cultural expectations. Service offerings also need to be adjusted to meet local expectations regarding support and information, particularly if the purchaser in the developing country is unlikely to have had the opportunity to obtain the technical education and skills available to purchasers in more industrialized countries. ADVISORY: Failure to adapt a product early enough can have disastrous results for the company. In more than one case, companies have begun selling their standardized product into a new foreign market only to discover that local consumers did not like the product. At that point, no amount of local testing and adjustments can overcome the initial bad impression in the minds of consumers. The company may have to withdraw from the market; it may re-enter at a later date with a localized product and new marketing pitch that masks the identity of the seller and its relationship to the earlier failed product.

Research and Development

At some point in the evolution of an organization, the operators must consider research and development strategies and procedures. In general, research and development is the process of developing new products. But it also includes improving and enhancing existing products, creating or adopting methods for enhancing the efficiency and cost-effectiveness of internal production and business systems. So-called R&D activities includes applied research designed to solve specific problems and achieve agreed upon commercial results, adaptation of basic research (i.e., advanced knowledge and technology not originally created for commercial purposes) and acquisition and adaptation of technologies and ideas from third parties through licensing and other technology transfer methods.

There are a number of key issues that must be addressed when describing the company’s development processes. For example, it is important to identify the sources for the company’s products. The company might rely on its internal engineers and researchers for development of new products. Alternatively, it may license or acquire all or part of its products from third parties. Manufacturing capabilities also present an interesting question, particularly when the company is relatively small and lacks the financial resources necessary to build its own

plants or facilities for production. Finally, the company’s distribution strategy may rely on its own sales force, sales representative and distribution agreements with third parties, or a combination of both.

Historically, global organizations adopted a centralized structure for R&D management with a central office or department responsible for deciding the type of research that would be performed and how innovations would be shared throughout the organization. Since all geographic divisions within the organization were dependent on the development of new ideas, it was thought to be essential that one central point within the company would serve as the clearinghouse. However, several recent trends have challenged the notion of centralized R&D, including the view that innovation can be found throughout the world and not just in two or three countries. There is also a need to develop localized solutions to production problems and customer requirements. Governments offer incentives to foreign companies that are willing to set up R&D departments that utilize local scientists and collaborate with educational institutions in neighboring communities.

GLOBAL INNOVATION MANAGEMENT Although the R&D activities of global organization may be dispersed over a number of locations in different foreign countries, long-term strategic R&D goals of the company must still be established by senior executives at the top of the organizational hierarchy. At that level, the company can best determine if its main interest is the development of a large portfolio of new products or the generation of new technologies that can be licensed to third parties. The latter can be used to improve the quality of the company’s own production processes. Initiatives to enhance and improve existing products to extend their life cycle should also be launched at the top in conjunction with the pursuit of new foreign markets for such products. In any event, once these decisions have been made, the challenge for strategic managers in each region and country is to assign projects and priorities to their respective R&D departments.

ORGANIZATIONAL R &D GUIDELINES When planning for global R&D activities, managers must follow certain overriding guidelines that apply to each project and to the structure and operation of the entire R&D function. These guidelines should cover the scope and goals of

R&D projects, the speed of the development cycle and procedures for benchmarking R&D activities. PLAN TIP: It is common for companies to actively seek breakthrough products that can alter competitive conditions and generate significant returns on investment. However, the easier way to achieve positive results from R&D is to concentrate on smaller R&D projects that have foreseeable objectives and are more easily managed. In selecting such projects, pay attention to the requirements of all segments of the global organization. A good R&D project for a global organization is one that results in new products or applications that can be quickly diffused to all parts of the company and applied in multiple markets, thereby effectively spreading out the cost of R&D.

Efforts should be made to streamline the decision-making process with respect to R&D projects. Companies should first define general standards of performance that would apply to all R&D projects. These might include projected return on

investment, time for completion of the development cycle and the optimal size of the development team. Once those standards are established, they should be applied in a way that minimizes the decision-making hierarchy so that designers and scientists can get rapid feedback from top managers in the event that new ideas arise during the actual research activities.

GLOBAL R &D ORGANIZATIONAL PROCEDURES Although a global organization will generally have at least some small, centralized R&D office, the primary focus will usually be on the activities being carried out in the various foreign R&D departments and how the results of those activities can be applied in other parts of the organization. Each R&D department should have a clear and concise goal and direction that can be supported by appropriate budgets and monitored through agreed upon standards and benchmarks. In most cases, these departments will have relatively short-term projects, such as modification of products to suit local needs and customs and technical service. If appropriate, funds can also be allocated for the development of completely new products (i.e., different from those otherwise offered globally) to meet the needs of the local market and compliment the company’s product line. Planning and budgeting, which are important functions in strictly domestic

R&D activities, become even more significant for global organizations. The key question is to determine how R&D activities can be best allocated among the various foreign R&D departments. The general solution is that comparative advantages can be created from a global R&D organization and should be exploited by companies whenever possible. For example, a company may be able to access a pool of specialized scientists and engineers in one part of the world who are positioned to uncover technological solutions more quickly than colleagues in other parts of the world. The overhead costs associated with R&D may be lower in a particular country, either due to lower overall cost of living or the availability of local government incentives. Communication is another important element in conducting global R&D. In many cases, effective R&D, even for discrete foreign markets, requires collaboration among personnel spread throughout the world. Product development teams will often include scientists and engineers from several different locations, thereby allowing work on a project to proceed on a roundthe-clock basis. For this approach to be effective, management must create a comprehensive global communication system that will support all of the required interaction. This may include use of the Internet and intranets as well as project management strategies that create the proper sequence of activities and tasks.

Intellectual Property

In large part, your company’s competitive value depends on its R&D activities and ability to protect the products that embody that technology. Accordingly, the business plan must identify and secure the company’s intellectual property (IP) rights, including patents, copyrights, trademarks and trade secrets. Although it is

not necessary to include full legal descriptions of each IP right, the reader should gain a sense of the efforts that have been made to protect the company’s core IP in all key geographic markets.

Obviously, the significance of IP to any business enterprise will depend on its purpose, mode of operations and the environment and markets in which it operates. For example, the growth and development of a high-tech firm clearly depends on its ability to build and maintain a strong portfolio of technology “assets.” On the other hand, the strength of other firms may not be in technology or research but in their skills in production, marketing and distribution. Even in those cases, technical assets such as production “know how,” trade secrets (e.g., customer lists and informational databases) and trademarks may play an important role in the success of the firm. For this reason, the business plan should describe the company’s policies and viewpoint regarding the overall importance of IP rights in the particular industries and markets where it is active.