BUSINESS MODEL ADAPTATIONS FOR THE
RELEASE OF INNOVATIVE PRODUCTS IN AN
INTERNATIONAL SUBSIDIARY
COMPANY CASE
Danieke Prins S2544652 MSc BA SIM
Supervisor: Pedro de Faria Co-assessor: Jana Oehmichen
20-01-2020
Table of content
Abstract 2 1. Introduction 3 2. Literature review 6 2.1 Internationalization 6 2.1.1 Entry strategy 7 2.1.2 Business model 9Business model adaptation 9
Tension between adaptation and standardization 11
2.2 Relationship between headquarters and subsidiaries 14
Knowledge sharing 15
3. Methodology 19
3.1 Research design 19
3.2 Case selection 19
3.3 Data collection and analysis 20
Data collection 20
Data analysis 22
3.4 Research quality 22
4. Findings 23
4.1 Product and market challenges 23
Potential of the product in the European market 25
4.2 Communication and the relationship between headquarters and subsidiaries 26
Organizational set-up and communication 26
Decision making and local influence 28
4.3 Current situation and product understanding 29
Current market presence in Europe 29
Implementation and important takeaways of the commercialization of product X in the USA 31
4.4 Business model adaptations 33
Opening of new channels: e-commerce and digital experience 33
Education 35
Sustainability 35
Local production 36
Set-up of a local team 37
Local adaptation 38 5. Discussion 40 5.1 Organizational structure 40 5.2 Channels 42 5.3 Environmental context 44 5.4 Additional findings 46 5.5 Proposed model 48 6. Concluding remarks 49 6.1 Implications 49
6.2 Limitations and future research 50
Acknowledgments 51
References 51
Abstract
New technologies and innovative products are brought to the market on a daily basis, which leads to a change of dynamics in industries and requires different business model adaptations. Existing research focuses on entry strategies of companies in a new international market and different business model adaptations, but has not focused yet on how a multinational corporation that releases an innovative product in an international subsidiary adapts its business model. This phenomenon is different since it is not a new investment, but the step afterward, as it implies adaptations to a decision that was made in the past on how to enter the market. In order to understand this phenomenon, an in-depth single case study in the sports industry was conducted. It contributes to the expansion of business model adaptation research and suggests propositions that can be used for empirical testing. The presented findings suggest the following business model adaptations: firstly, the voice and the role of the subsidiary should be emphasized, which suggests the set-up of a dedicated team. Secondly, the release of an innovative product implies changes in the way the company conducts business in a market and changes the way of interaction with its consumers. The product release can be used as an instrument to align the strategy of the headquarters with the subsidiary. Lastly, the business model needs to be adapted to the environmental context, by taking the local market pressure and regulations into account. An additional finding of this research is that the innovativeness of the product seems to increase the business model adaptations needed for the release of a product in an international subsidiary. For managers, this research creates new insights into the management of internationalizing an innovative product in its subsidiaries, which helps improve their international success. Furthermore, it will help managers understand how the release of an innovative product differs from a regular product and how those challenges can be anticipated.
Keywords
1. Introduction
Innovation is defined as ‘’ the commercialization of any new product, process, or idea, or the modification and recombination of existing ones’’ (Rothaermel, 2013, p. 17), and new technologies and innovative products are brought to the market on a daily basis (Chakravorti, 2004). Researchers agree that innovation is important for the success of businesses, for example, research by McKinsey (2010) shows that 84 percent of executives say that the future success of companies is dependent on innovation.
The motivation behind this is that more innovative products are released in the markets than ever before and it would be useful for companies to better understand how to successfully launch those products in their subsidiaries (Chakravorti, 2004).
Therefore this thesis will look in more detail into this and will answer the following research question:
‘’ How does a multinational corporation that releases an innovative product in an international subsidiary adapt its business model? ‘’
This research will investigate and analyze this research question through qualitative research, for which a single-case study is conducted in the sports industry, which looks at the transfer of an innovative product from the American to the European market.
The case is about an American leading company in the sports drink industry. It was founded in 1965 at the University of Florida and is a brand that is part of a bigger food & beverage group (Internal documents company, 2019). The innovation department of the company developed a new product line, called Product X, which is a personal hydration formula available to both professional- and recreational athletes. The technological innovation aims to restore the athletes’ nutrition and minerals via consuming personalized sports drinks and thereby ensuring optimal hydration which will help them to increase their performance. The company is considering to launch their innovative product in Europe, where they already have a subsidiary, but of which they lack crucial knowledge for the release of this innovative product.
The definition used for sports innovation throughout this thesis is ‘’proactive and intentional processes
as it is known to be highly innovative and has the capacity to adapt to the ever-changing environment, which is supported by the rising globalization, commercialization and the development of new sports (Tjonndal, 2018; Hillairet, Richard & Bouchet, 2009; Tjonndal, 2017). One of the main reasons for this is because the sports industry experiences an increasing necessity for new technologies and other innovations, with the goal to continuously improve the results of athletes (Tjonndal, 2017). An example that confirms this interest, is the USA Olympic Committee which tries to achieve an increasing amount of medals for its team and therefore has a separate technology and innovation department with the aim to strategically build and grow a technology and innovation network for the athletes to work with (Ogus, 2019). However, new technologies are not only used for professional athletes, also many local teams and semi-professional athletes make use of it. Overall, the amount of new technologies brought to the sports market is huge, from new data analysis methods to virtual reality to wearables. Moreover, there are many different company types involved in sports innovation, from start-ups to multinationals, such as Nike, Under Armour, and Gatorade. To conclude, the industry is highly under-investigated, while it is very innovative and internationally focused since worldwide a lot of people are affected by sports. This is the main reason why I chose a case study in this industry in order to help answer my research question.
2. Literature review
In order to answer the research question, firstly the different existing entry strategies will be discussed. The different existing entry strategies all lead to varying levels of commitment, investment, risk, control, and returns and form the basis for the launch of an innovative product in the international market. Literature about the market entry strategy is included because the business model adaptations required for a product entry strategy are based on decisions that were made before about entering the market, thus this literature explains the step before product entry strategy. After assessing the involvement level of the company in the international market, existing literature about business model adaptation will be discussed. In order to understand the decision making behind the entry strategy and business model adaptations, a link is made with the relationship between headquarters and subsidiaries, since the organizational set-up of a company influences the way the subsidiary conducts business in its market (Ambos & Birkinshaw, 2010). It is important to understand the foundation of the subsidiary in order to see how it affects the entry strategy and business model adaptation. The literature section will be finished with an explanation of the research gap.
2.1 Internationalization
2.1.1 Entry strategy
The first step in the internationalization process is the conductance of a thorough market analysis, which helps companies decide whether they should enter the new market or not (Dunning, 1998).
After this, the second step is the market entry strategy, which is shaped by the match between the cost of entry mode and the company’s objectives (Dunning, 1998). According to the literature, the different multinational business entry strategies have a major impact on the successful entry of the new, foreign market (Hill et al, 1990).
Vernon, 1983), which refers to the dedicated assets that cannot be redeployed to alternative use without cost. For example, this commitment of the multinational will be low with licensing, and high for a wholly-owned subsidiary. Apart from the amount of control and research commitment, dissemination risk also plays an important role in entry strategies. This refers to the risk that company-specific advantages in knowledge can be expropriated by a partner. This risk is high in the case of licensing or joint venture partnering (Hill et al, 1988). Research by Hill et al (1990) looks in more depth into the different environmental variables (country risk, location familiarity, demand conditions, volatility of competition), transaction variables (value of company-specific know-how, tacit nature of know-how), and strategic variables (extent of national differences, extent of scale economies, global concentration) affecting the entry mode decision. Research by Chan Kim (1992) confirms that environmental- and transaction-specific factors affect the entry mode decision, but in addition discusses that the multinational’s global strategic posture needs to be taken into consideration when choosing the entry strategy. This is based on the fact that multinationals compete more with each other nowadays, and their chosen strategies in one market may have repercussions in other markets (Watson, 1982). According to Hill (2007), the optimal entry strategy depends highly on the firm’s overall strategy and its global objectives.
2.1.2 Business model
The third step of the internationalization process is the business model and its potential adaptations. A business model is ‘’ a plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing’’ (Oxford Dictionary, 2019). It brings together the strategy formulation and implementation (Zott et al, 2011).
Business model adaptation
There are different views on whether a company needs to innovate and adapt its business model when internationalizing its products. This tension and trade-off in business models is based on two views: some researchers say it is not needed to change anything if you are successful in your main market, while new research has come up that argues that you should (Rask, 2014; Cao, 2018).
Throughout this thesis, both business model adaptation and innovation are considered, since there is little research available about each topic separately, and both imply business model changes in line with the different challenges of the market, which is of relevance for this research (Saebi et al, 2017). The main differences are that the first one aims to align with the environment, while the latter tries to disrupt market conditions. This means that business model adaptations involve changes to the existing business models, while business model innovation could potentially result in the creation of a completely new business model (Foss & Saebi, 2014).
be more consumer-focused and more flexible than before, and they should be able to adapt the business model in order to deal with the external, currently upcoming technological, market and legal changes (Teece, 2009). Research by Zott & Amit (2010) confirms that the external environment needs to be considered carefully in order to successfully innovate the company’s business model. Research by Giessen et al (2010) adds to this that a business model functions best if it carefully considers the external environment and addresses emerging market opportunities while it also suits the economic environment.
For extension, ‘’the multinational should focus on the capitalization of their existing resources generated in their home market’’, for embeddedness, ‘’the priority for them is to be aligned with the business practices of the local suppliers and the competitors’’ , and for autonomy, ‘’they should encourage local
talents to develop new products, services, and technologies to adapt to the local consumers’ needs’’ (Cao,
2018).
According to Giesen et al (2007), for established companies, it is effective to focus on partnerships and external collaborations as a way to innovate the business model. In this way, the company is more flexible and can scale its operations in a more efficient way. In this way, a competitive advantage can be created. However, Khanna and Palepu (2010) argue that the state of qualified, external partners present in the new market differs and affects the business model.
Tension between adaptation and standardization
Apart from the business model adaptation, several researchers argue that it is best if a company addresses value proposition through only one particular product or service, with a simple business model and simple products, when entering a new market (Haldimann & Graser, 2019; Kelly, 2015). According to Kelly (2015), this is one of the most common mistakes companies make when entering a new market. Her research argues that companies too often do not adapt the product offering, even though the new market might not be familiar with the features of the company yet. According to her research, it is more effective to enter such a market with a more basic version of the product and let the customers get used to it first. However, other researchers disagree with this statement and argue that in the current networked markets the decision to buy a product is mostly based on whether the person believes other people will buy it as well rather than it being based on the difficulty of the product (Chakravorti, 2004). Networked markets help diffuse new innovations more rapidly, but the interdependence between people makes the adoption of new innovations more challenging. Research by Chakravorti (2004) argues that in order to successfully launch an innovative product, companies should develop new strategies by using game theory.
2.2 Relationship between headquarters and subsidiaries
As mentioned earlier, communication and the role and attitude of the headquarters are intertwined with the business model and play an important role in designing and facilitating the innovation process (Leeuwis & Aarts, 2011). For this reason, it is important to also look at the relationship and communication between headquarters and subsidiaries in order to be able to answer the research question and understand better what makes the international release of a product successful. Historically, the relationship between the MNC headquarters and its subsidiary were seen in a hierarchical way, where subsidiaries had exploitation roles, and were involved only in the operating activities in the foreign market. Headquarters’ functions and strategic activities were kept in the home country (Benito et al, 2002).
To conclude, the role of the subsidiary has changed, since nowadays they are more often involved in strategic decision making. The way the headquarters position the subsidiary influences its international development and decision making.
Knowledge sharing
Researchers agree that foreign subsidiaries of MNCs are important for the overall performance of the company and are a source of competitive advantage since they create non-duplicative knowledge of the foreign market and environment and help build networks to support the internationalization of the MNC (Gupta & Govindarajan, 2000; Birkinshaw, 1996; Hedlund, 1986). Subsidiaries build close relationships with the external environments, which help them to develop new knowledge and to innovate, which leads to an increase in its performance, which in turn also helps the overall MNC (Andersson et al, 2001).
Another factor that makes the knowledge sharing difficult, is argued by Birkinshaw and Ridderstrale (1999), who state that MNCs are sometimes generally affected by organizational obstacles that resist the advancement of initiatives suggested by the subsidiaries, often due to the ethnocentrism, where the manager of the MNC tends to rely on the values and interests of the parent company in formulating and implementing strategy. It happens regularly that headquarters lack an understanding of the local market, its environment, and the potential of its networks, as often they are not directly involved in those networks (Andersson et al, 2005).
Furthermore, the integration of the subsidiary into the overall MNC is seen as very complex, since the headquarters are often not able to give full attention to all subsidiaries, which forces them to divide their attention. The smaller, geographically further away subsidiaries get less attention in this case (Bouquet & Birkinshaw, 2008). In case the integration of the subsidiary into the overall MNCs network is not done properly, management problems may occur and the foreign subsidiary might not contribute to the overall company’s benefit, in which case the headquarters fails to meet subsidiary’s innovation and miss out on inter-unit learning opportunities (Bjorkman et al, 2007).
However, headquarters often do not provide the foreign subsidiary with enough information either. These perception gaps are likely to occur due to the managers’ different experiences regarding the level of information provided and how this information is interpreted (Asakawa, 2001; Birkinshaw et al, 2000).
To summarize, in order to transfer complex and tacit knowledge, communication is needed. To achieve this, new knowledge-sharing practices need to be created and special attention needs to be paid to organizational collaboration and the capacity to transfer and assimilate tacit knowledge (Rolland & Kaminska-Labbe, 2008). For this, socialization mechanisms need to be set up (Gupta & Govindarajan, 2000). Furthermore, control mechanisms like incentives and evaluation processes should be individually adapted to the subsidiary’s environment (O’Donnell, 2000). To conclude, a properly planned integration process, which focuses on the company’s ability to acquire and learn new capabilities while also minimizing friction and conflict, is needed to capture the synergies between all entities (Bjorkman et al, 2007).
This topic includes parts from all three topics of the literature - entry strategy, business model adaptation, and the relationship between headquarters and subsidiaries, and will be explained by informing the discussion on those points of view. Therefore, since the existing literature does not provide insights on this, this thesis conducts a case study in order to understand the phenomenon and answers the following research question:
3. Methodology
As addressed in the literature review, there is a research gap regarding the needed business model adaptations for the launch of an innovative product in an international subsidiary. The following sections explain the research method that is used to address this gap and to answer the research question.
3.1 Research design
In order to answer the research question, I conducted an exploratory, in-depth single case study, which is suitable for theory development (Eisenhardt, 1989; Van Aken et al, 2012). Furthermore, a case study approach is often performed to explore a phenomenon that is relatively new and not often studied before (Jamshed, 2014). It allows for a more extensive understanding of complex phenomena, by studying real-life phenomena through contextual analysis (Zainal, 2007). For those reasons, this research method is highly suitable to explore the business model adaptations needed for a successful release product release in an international subsidiary.
3.2 Case selection
They are part of a bigger group, which has a huge presence and distribution network in Europe, and the company itself also opened its new headquarters in Dublin in September 2019. They are looking to expand their innovative product in Europe, a market where they have a small subsidiary. This case, which focuses on the transfer of an innovative product from the American headquarters to the European subsidiary fits completely with the research question.
Moreover, as discussed earlier, the sports industry is known to be highly innovative and experiences an increasing necessity for new technologies and other innovations, with the goal to continuously improve the results of athletes and teams (Tjonndal, 2017). However, not only professional athletes but also many local teams and semi-professional athletes make use of it. Since this industry is very innovative, directed towards commercialization, and internationally focused, it is highly applicable for my research and will help answer the research question.
3.3 Data collection and analysis
Data collection
manager will be interviewed, who has a more overall, general perspective and will help to understand the overall goal and positioning of the bigger group and company worldwide. The results of the interviews, in combination with quantitative numbers about the American market provided by the company, will help understand the vision and positioning of the brand.
Table 1: Overview of data sources
Interview number Team Role / Position Details
1 USA Director of Digital Platforms & Ecosystem
Innovation
Skype, 01h10
2 USA Head of Innovation & Design Skype, 01h20
3 USA Head of emerging brands
(commercialization development)
Skype, 00h45
4 USA Senior Marketing Director Skype, 00h40
5 Europe Head of Marketing & Innovation Western Europe + Vice President Skype, 00h40 6 Previously Global, now Europe
Marketing Manager Skype, 01h00
7 Global Senior (Marketing) Director Skype, 00h50
Data analysis
After the data collection process has been finished, Eisenhardt’s (1989) method for data analysis will be used. This method suggests starting with analyzing each individual case, by reading, coding, and interpreting the interviews. For the generation of codes, Excel is used, in which data groupings of the codes are created, which in turn will help to derive themes from the interviews. This method is useful for the selection process and interpretation of the development of theory. After the within-case analysis, the individual cases were compared to each other. Eisenhardt (1989) explains the tactic of selecting pairs of cases, which aligns the theory closely with the data and gives insights into patterns and helps to increase the possibility of accurate outcomes. In this case study, managers with a US perspective will be compared to managers with a European perspective. Finally, the individual- and cross-case analysis results will be compared to literature and propositions will be created which could be tested in future research.
3.4 Research quality
4. Findings
The aim of this section is to provide an overview of the outcomes of the case study. In total there are three subsections, each discussing a part of the research, namely: communication and the relationship between headquarters & subsidiaries, current situation, and product understanding, and lastly, business model adaptations. Before discussing the findings of this research, firstly the results of the interviews that give a general overview of the market and product characteristics and its challenges will be discussed.
4.1 Product and market challenges
This section explains the general background and position of the product in the market, which will help better understand the following sections.
‘’The main reason for its failure was that the financials were really bad in the e-commerce, because shipping finished goods from different parts of the world, where an entry starting point was around 30 dollars to get into the system, is very high. Moreover, the sustainability was not good enough and got challenged by European consumers.’’ (Director, personal communication, November 2019)
Product X currently faces similar product challenges, firstly, it is expensive, and secondly,, the right sustainability is not in place. It will be very important to overcome those product challenges in order to be able to enter the market.
The US market and European market are similar in many ways, as they are both well-developed markets. The biggest difference between the two markets is the regulations; the European market is much more strict on beverage and product compositions. This makes it in the case of this company very challenging and expensive to import the product to Europe, which often leads to the need for a complete change of product formula for the European market. (Internal documents company, 2019)
Potential of the product in the European market
All managers, regardless of whether they represent Europe or the USA, agree that the launch of the innovative product would add value to the market and could potentially be successful.
As stated by the European Director:
‘’ Europe, and in particular some areas within Europe, are at the leading edge of food & beverage innovation, particularly Sweden and many other markets: they are first in sustainability areas, first in new ingredients, first in new packaging formats, first in lifestyle, but all of this seems to be more typical for standardized categories vs sports drinks. You’ve got a large number of exercisers, a large number of healthy lifestyles, but you’ve got to educate them. So I think, from technology and from the benefit side it’s a very interesting market. ‘’ (Director, personal communication, November 2019)
However, they all look at the term ‘’success’’ from a different perspective: firstly, it could be seen as that the product would lead to an increase of brand equity, storytelling and innovation credentials. Secondly, it would create business and money, and thirdly, it would unlock new capabilities.
The American team has a clear opinion on this and believes that the product could be successful in Europe according to all three definitions, as has been proven in the USA already.
However, the European team sees the role of the innovative product differently, as they do not see the product as a commercial driver, but as one of the managers states:
Another European manager states that:
‘’The product is a great opportunity down the road, but right now we still need to unlock what’s the mas play for the brand in Europe. I see it as an equity driver in Europe in the future. ’’ (Director, personal communication, November 2019)
4.2 Communication and the relationship between headquarters and subsidiaries
In order to understand the current set-up in Europe, the first focus was on understanding how the group is organized, what the European team looks like, and how communication and decision making is between the HQ and its local subsidiaries.
Organizational set-up and communication
The current European team is a very small team, with around 12-15 people, consisting of a mix of Europeans and some Americans. The team consists mostly of employees of the overall group, who manage several brands of the portfolio next to the brand and thus do not have a dedicated focus on the brand. Many employees of this overall group do not have a sports background. This is very different from the USA, where around 50 marketeers are full time working for the brand. This is mostly because the brand is one of the most profitable brands in the portfolio in the USA. (Directors, personal communication, November 2019)
the Global team gives guidance to the markets, and supports them with their business strategy rather than fully controlling what they do. However, there is also some critical feedback saying that
‘’The problem is and always has been that the Global team is very small and they have probably not enough bandwidth to provide assets, definitely not enough bandwidth to provide enough business support for each one of the territories.’’ (Director, personal communication, November 2019)
Currently, the European manager connects with the Global team on a monthly basis and with the biggest European markets (Italy, UK, The Nordics) on a biweekly basis. However, she mentions that the biggest challenge is still that the brand is historically an American brand, so a lot of innovation in the pipeline has always been US innovation. Currently they are trying to change this by making some products specifically for Global. She also explains though that‘’In the US the brand is a multi-billionaire brand, but in the rest of the world it is smaller, and they do not necessarily have the same teams behind it, to put as much emphasis on communication, innovation, and the whole formative ecosystem really.’’
Specifically, regarding the innovative product X, the American team states that there has been support and communication to develop it in Europe on a professional level (with the partner clubs), but there has not been one stakeholder to connect with about commercialization, even though Europe was top of mind in the development of the pods.
Decision making and local influence
The approach the group takes is clearly a bottom-up approach, where local markets have to go through their regional structures to tell the global team they are interested in launching the brand in their market. However, the group does not approach a market to tell them that they should launch the brand. This is mainly because the market needs to support on the ground with production, distribution, tailoring messaging and the right channels, et cetera. Here it is important to know that the brand runs on a franchise corporation and uses the franchise bottlers of the group, but currently imports almost all its products. The European team will have a lot of influence on the launch and need to feel empowered that they do the marketing they feel would be effective, while at the same time applying a level of coherence in terms of brand positioning. In order to support the local markets, whenever a market shows interest, the global team has the assets, plans, and strategy ready to go to support the local market where needed. Even though the brand is not a high priority in most markets in Europe, especially not for drinks, there is a high potential for other products like proteins and other sports nutrition, which makes it for example brand priority number two in Italy. A quote that explains the influence of the local market:
The American team, however, says that from a product perspective, the bargaining power of any European Market is very limited, because ultimately the US resources are developing it and the economic opportunity in Europe does not outweigh the USA (and probably never will). They state that
‘’the EU does not have the same gravity in the equation that would allow them to really drive anything.’’
(Director, personal communication, November 2019)
The American team is more than willing to support the European markets, that is also why some EU-compliant pods are produced, but only to an extent that it does not slow down their own business and development. This is mainly because it is not the American team’s responsibility to develop the product outside of their region.
To summarize, the European team will have a lot of influence on how the brand expands in their markets, however, they need to push it themselves, and should not expect too much support from other markets, since each market has its own goals and operates separately. Those factors might influence the way the brand does business and operates in the different European markets and is thus relevant information for this research.
4.3 Current situation and product understanding
Current market presence in Europe
Up until today, products have been launched in Europe with the mindset of offering products that the brand thought the market needed, but those product launches were not successful. The new priority is to
‘’take a step back, take off the group’s lens of doing the thing that we want to bring to the market, and do what our consumers really want. Let’s follow that philosophy.’’ (Director, personal communication,
November 2019) However, the current research is not focused on innovative product X, solely on other products. The team is aware though that ‘’The first step in order to know whether the launch of the innovative product X makes sense, is to do market testing to see how it scores against other products, then secondly a pilot should be done, and then thirdly one needs to decide on the details like local manufacturing vs importation et cetera.’’ (Director, personal communication, November 2019)
In terms of brand image, the image is actually very positive and the brand has high awareness among consumers also in Europe. Most people know the American side of the brand but have not found a way yet to connect with it. While in some markets the American aspiration strongly exists, for example in South-America, in a market like Europe this is not the case. Many local markets in Europe prefer to buy from local brands. This means that a high initial investment is needed in order to change the behavior of the consumers and penetrate those markets. Thus in order to be successful in Europe, a high initial investment is needed in combination with local market tailoring, and secondly, the physical availability through the franchise operation needs to increase a lot.
Implementation and important takeaways of the commercialization of product X in the USA
The implementation of the product was very different from regular product implementations, as quoted by one of the directors:
‘’ The launch of Product X in the USA was untraditional since it was never intended to launch in retail. Normally when you commit to a customer that you are going to launch a new product, you have to do it, thus we decided to exclusively launch on the company’s website first so that it would not really matter if the launch date slipped.‘’ (Director, personal communication, November 2019)
The aim was to launch the product in time, but there were a lot of challenges in the production phase. For those reasons, it made sense to keep the launch small and not put too many media efforts or marketing dollars in it. Another very important aspect was managing expectations. The actual plan was to just put it out there and see what happens, as quoted by one of the directors:
‘’There is a point where you have to accept that we do not know what we do not know and because this was going to break through a new product for the consumer, a new channel for us, new proposition. There is a limit to which you can plan for, we set this thing up more to learn from in the early days, then for it to achieve certain things.’’ (Director, personal communication, November 2019)
During the implementation phase, the team put the bottles and products in the hands of professional athletes, professional teams, and high school and college teams, in order to get feedback on the product and create brand awareness at the same time. This huge access to athletes is a unique advantage of the business model of the brand.
There is a very neat progressing of sales and adoption, however, the brand is currently still trying to achieve the critical mass of pods, which will be achieved early 2020. The American team points out the important takeaway that the European markets need to be ready to operate at a loss for 1 to 1.5 years until they have enough scale to get the right profitability. This is very challenging for any Market within the group’s portfolio since their philosophy is to create profitable business since day one.
The American team learned several things with the launch of the product, of which recycling is probably the most important thing. They highly recommend the European team to think about this factor, as quoted by one of the directors:
‘’There is reason to believe that people are attracted to reusable water bottles, especially personalized. The form factor is great, it is easy to transport. I think the one thing that is the main concern to launch in Europe to go big is the recyclability of the pod. ‘’ (Director, personal communication, November 2019)
The current situation is the following, in order to produce pods, around 69% less plastic is needed compared to normal drinks of the brand, but there is a very poor system in place to recycle the pods for which consumers need to personally collect their pods for this and send them back to the brand. Apart from this system, there is no way to recycle the pods at the moment. However, several team members mention that one should see the current pods as version 1.1, and they are currently trying to make them more sustainable, by for example offering them in the form of tablets. They also acknowledge that this will be a far bigger issue in Europe than in the USA since people have very different mindsets.
implementation in the USA. Firstly, a soft launch seems to be the right way to approach the product, it is important to create brand visibility at an early stage by putting the products in the hands of partners, and sustainability is one of the failures in the American launch, which needs to be improved before launching in Europe.
4.4 Business model adaptations
So far the findings section explained the general situation of the brand and the foundations in place for the launch of the innovative product. To build upon this, in the following section the different crucial factors and potential business model adaptations needed for a successful launch in Europe will be discussed.
Opening of new channels: e-commerce and digital experience
There are different ways to launch a new product in a market where the brand is already present, firstly, this could be done by implementing the product on the channels where the brand is already selling, or secondly, one could create business via new channels. In this case, all interviewees agree that the second option will open new business opportunities for the brand and will be the right approach.
The value of the product X is the personalization aspect, which requires a different go-to-market approach compared to the introduction of normal products of the brand, mostly because this product requires much more consumer engagement. For example, when one would like a bottle with one’s name on the ID ring, you need a digital experience to be able to do that. In this way, you create a direct-to-consumer type of business model, which is a capability that many companies are interested in building, mainly because you get to know so much about your consumers.
they need, so that they know what to purchase. For the product to grow commercially within the region, all interviewees agree that the online experience needs to be outstanding. E-commerce is closely connected to the product and plays an important role in terms of user experience.
One of the global directors states that:
‘’Traditionally innovation and R&D departments think about the products and the consumer and how it gets used, but ultimately the success of launching anything in the market will be the ease with which the user can adopt it and it is the experience that the consumer has in terms of interfaces, the functional efficiency and efficacy of technologies and then ultimately the delivery experience of the product as well, in terms of how does it get to them, do they have any difficulty in receiving the product that they purchased and then how can they give feedback and how can the purchase then be tailored in the future.’’
(Director, personal communication, November 2019)
From a European perspective, currently, in Europe only the UK market and Italy will have an e-commerce platform soon.
The set-up of an e-commerce platform for the product could also improve and change the current way regular products of the brand are sold, it could be interesting to sell additional products, such as equipment, on the online platform.
Education
As mentioned earlier, the innovative system is more difficult to understand than regular products, and for this reason mainly in Europe education will be an important puzzle piece to make the product successful. First of all, people in Europe need to be educated why they should consume sports drinks, secondly, they need to be educated about why they need personalization in order to increase their performance. They need to be educated about the platform, since the current system is not part of everyday life, as people are just buying ready-to-drink products. (Directors, personal communication, November 2019)
An easy to implement solution would be to educate the people via the brand’s website, but company data confirms it is very hard to get people to the website. Thus, in order to educate people in the USA about the platform, its usage and its relevance, in the beginning stage the team and representatives of the brand (partners) often physically went to visit different teams, events et cetera. to explain face-to-face how to use it. In Europe the network of partners is very small, currently, only in Italy there are a lot of partnerships, thus this would need to be developed if they would like to follow the same (successful) approach as in the USA. (Internal documents company, 2019)
Sustainability
Another factor that is very important for a successful upgrade of the subsidiary is the trend of sustainability. In this case, sustainability plays a much bigger role in the European market than the American market (Yale Environment 360, 2019). The American interviewees confirm this statement.
sustainable vessels and the use of much less plastic for the pod compared to a regular bottle of the brand, which contains the same, but does not transmit that the pods themselves are currently not recyclable. This would need to improve drastically in order to be able to launch the product on the European market.
The brand is currently investing to make the pods a hundred percent recyclable, this process will most likely take around two years.
Local production
An important factor for the launch in Europe is the financials, since the access to the innovative product’s system is quite expensive, and will be even more expensive in Europe if the pods need to be imported from the factory that currently produces pods, which is based in Puerto Rico. The American team confirms that ‘’The price of getting the product to some distribution center in Europe and then to the consumer, might prevent the product from being priced in a way that is attractive to consumers.’’ The global team confirms that the one way to improve the financials of the product is by the set-up of a local factory.
However, in order to obtain the initial capital investment in local production, a certain threshold of sales needs to be achieved first, or it needs to be possible to indicate an x amount of sales in Europe, based on the amount sold in the USA. A proven business case is needed to show the group that the investment is worth it.
Set-up of a local team
In the current set-up, there is a fully dedicated brand team in the USA, in Chicago, but apart from that,, there is no fully dedicated team in any other country in the world. In Europe, each market has managers who oversee several brands and only dedicate a part of their time and budget to the brand.
The European interviewees argue that it is not necessary to set-up a small, fully dedicated team in Europe since the business is small. Furthermore, one of the managers states that:
‘’ The resource has not been allocated because there are currently some supply constraints that prevent many of our franchise bottlers efficiently producing the product and not because the brand does not have potential to grow. Over the coming year or two, we will overcome these supply constraints, and with this available volume we will be in a position to select target growth markets and assign the appropriate investment and resource to drive the growth and penetration we all want to see! ‘’ (Director, personal communication, November 2019)
However, the European team does not agree with this and says that even though sports knowledge helps, it is not mandatory. One of the managers states:
‘’ I think that’s the beauty of the brand since it has such a clear playbook of what you need to do. You need to communicate the brand in an inspiring way and need to drive brand superiority against the competition. You need to invest in the right sports marketing partners and have money to amplify those partners. And if you don’t have the money locally, there’s amazing global access that you can leverage.’’
(Director, personal communication, November 2019)
In the early stages of product X in the USA, there were also limited resources available for its implementation. One of the managers confirms that the set-up of this team would make the business grow much faster, and he quotes:
‘’ When we launched this, launching equipment was not my full-time job, I was a one-man team, it was supposed to be 20% of my time, so it’s not impossible to do, but I know there are things that I’d have liked to have done if I had the possibility.’’ (Director, personal communication, November 2019)
The rest of the American team also agrees on the opinion that more resources will accelerate growth and that a small, fully dedicated team for the brand (not only for the product X but also for equipment et cetera) will help build a really strong brand block, even though it is an investment.
Local adaptation
EU compliant. In order to be able to import the product to Europe, a lot of paperwork needs to be taken care of. Research by the American team shows that ideally five different flavors for each composition should be available. This is not a major issue but would require a lot of work.
Another small local adaptation needed is the squeeze bottle color and prints that need to match with local teams that receive a lot of support from the consumers.
5. Discussion
In the following subsections, the findings of this research are compared and explained with the support of the literature. In order to answer the research question, ‘’ How does a multinational corporation that releases an innovative product in an international subsidiary adapt its business model? ’’, the subsections organizational structure, channels, and environmental context are explained. Furthermore, additional interesting findings were found, which will be discussed in the sections implementation differences, education and production challenges.
5.1 Organizational structure
In this case study, dissimilarities were found regarding the optimal organizational structure of the company for the release of the innovative product, where the American team sees the need for a dedicated team, the European team does not.
All respondents of the European team do not see the need to have a dedicated team since the brand is very small and restricted due to supply chain constraints. Conversely, all American respondents do see the benefit of having a fully dedicated team, since it will help the business grow more quickly, it will lead to a team with full sport expertise, and it will help build a strong brand block.
One potential explanation for this misfit of perception is linked to the market entry strategy literature. The European market is managed via a franchise structure, which is defined as a low risk, low control and low resource commitment entry strategy (Chand, 2010). This could potentially be linked to the European managers’ attitude towards creating a fully dedicated team since the manager needs to divide his attention between different brands and might thus prefer to keep the lower resource commitment and risk. The American market is based on a wholly-owned subsidiary structure, which is defined as a strategy where the company has the highest control and resource commitment (Chand, 2010; Vernon, 1983). This could be linked to the American managers’ attitude in a way that they are used to full commitment and have already experienced how this potentially risky challenge can be managed.
However, according to literature the set-up of a dedicated local subsidiary would make sense. It is in line with the general development of the role and the increased voice of the subsidiary. According to research, in the past, the relationship between the MNC headquarters and its subsidiary was seen in a hierarchical way, where subsidiaries were only involved in the operating activities of the foreign market, while nowadays this perspective is different since the MNC is seen as a web of diverse differentiated relationships (Benito et al, 2002; O’Donnell, 2000; Araujo & Rezende, 2003). Research confirms that through the increased voice and inclusion of the subsidiary, they can manage to build close relationships with the external environment, which helps them create innovative, new knowledge, which helps the overall MNC in the long term (Andersson et al, 2001).
Moreover, due to the limited capacity of the headquarters, the small subsidiary currently does not get a lot of attention from the headquarters, which may lead to management problems and a negative overall benefit of the subsidiary. In this case, the headquarters miss out on inter-unit learning and innovation opportunities (Bjorkman et al, 2007). For this reason, besides the set-up of a dedicated team, more attention needs to be given to the relationship as well.
Lastly, several researchers explain the need for a dedicated team to internationally expand business (Think with Google, 2014; Storey, 2018; Johnson, 2017). However, this interesting angle and misalignment of perception need to be further investigated by future research.
In this case, the set-up of a dedicated team could be used as a mechanism to increase the speed and improve the launch of the innovative product. This leads to the following proposition:
Proposition 1 : The set-up of a dedicated team is an effective business model adaptation to release an innovative product in an international market.
5.2 Channels
The introduction of this innovative product leads to changes in the way the company conducts business in the market and changes the way the company interacts with its consumers. This different way of interaction with consumers is in line with the literature, which emphasizes the need for consumer-focused products (Teece, 2009). Furthermore, research confirms the need for companies to focus on e-commerce, as 63 percent of global internet users purchase products online (Clement, 2019). Moreover, it is a way to attract new customers, overcome geographical limitations, lower costs, and help conduct customer analytics (Digital market institute, 2018).
The new product release can also drive the change the headquarters want to achieve for a long time already, which will lead to a better alignment of the subsidiary with the strategy of the headquarters. In general, headquarters have a high influence on the changes in the subsidiary and always try to control the subsidiary (Kostova & Roth, 2002; Asakawa, 2001). Furthermore, the earlier mentioned statement is in line with literature which emphasizes that the relationship between headquarters and subsidiaries is one of the main priorities, not only for the headquarters to learn from the subsidiaries, but also to be able to coordinate and implement the company’s global strategy (Ambos et al, 2006; Barner-Rasmussen & Bjorkman, 2005; Kogut & Zander, 1993; Qin et al 2008).
In this case, the launch of the innovative product implies changes in the way the company conducts business in the market and changes the interaction with its customers. This leads to the following proposition:
Proposition 2 : The implementation of an innovative product in a subsidiary implies changes in the business model and can be seen as an instrument for the headquarters to implement a business model adaptation they already wanted to achieve.
5.3 Environmental context
Respondents of both the European and American teams pointed out the need for a more sustainable product offering in order to successfully enter the European market. Both teams confirmed that the European market is much more advanced with sustainability than the American market and that the current product, which uses 69% less plastic but is not recyclable, will not be good enough. Sustainability is seen as both an upcoming trend and a real need for society, which is highly valued by consumers these days. This is in line with research about business model adaptation, which points out that the external environment needs to be considered carefully and needs to suit the economic environment (Teece, 2009; Zott & Amit, 2010; Giessen et al, 2010). Furthermore, research shows that there is high pressure for adaptation when consumers have very different tastes and expectations between countries, which is in line with the earlier discussed differences between the European and American markets (Hill, 2015).
In this case, the company adapts to what is required from the environmental context, both related to local market pressure (sustainability) and institutional environment (regulations). This leads to the following proposition:
Proposition 3 : The environmental context (local market pressure and regulations) influence the release of the innovative product and leads to a business model adaptation.
5.4 Additional findings
In addition to the findings that answer the research question, some other findings were found. This thesis does not theorize about the effect of the innovativeness of the product on the business model adaptations, however, during the interviews, it came to light that this is an important factor to consider. Therefore, the following section will reflect on this topic as well.
Implementation differences
One of the main differences in the launch of the innovative product in the USA compared to the launch of a regular product was the different implementation strategies used. The brand decided to launch the product small, without putting in many media efforts or marketing budget. The main reason for this was the need to manage expectations since the launch of such an innovative product is much riskier than the launch of a regular product. Those insecurities led the brand to exclusively launch online in the early stages of commercialization. This effect on the business model adaptation is in line with research by Landau et al (2016), who argue that the business model is adapted and extended stepwise, in line with the depth of involvement in the new country. Furthermore, the entry strategy is affected by the amount of risk involved (Rugman & Colinson, 2009; Calof, 1995).
Education
In case this is done correctly, the networked markets will help diffuse and adopt the innovation rapidly.
Education could be an important piece of the new strategy to successfully convince consumers and launch the product.
Production challenges
When a new, innovative product gets launched in a market, there are a lot of unknowns. One major challenge is that it is difficult to forecast if people are interested in the product and how many will actually buy the product. Most companies do not want to invest in local capabilities until a certain threshold of sales is achieved or a proven business case is presented, which also means that production is not on a high scale until that moment.
Demand conditions are discussed by Hill et al (1990) in this research, where it links the environmental variable demand conditions to the entry mode decision, but apart from this, the topic production challenges is out of the scope of this research and would thus need to be further investigated by future researchers.
To conclude, according to this case study, the innovativeness of the product seems to influence the business model adaptations. This leads to the final proposition:
5.5 Proposed model
6. Concluding remarks
6.1 Implications
The findings of this research contribute to the existing perspective on business model adaptations, as a specific focus on the release of innovative products in a subsidiary and its effect on the business model adaptations has not been investigated before. The main contribution of this thesis is the creation of a deeper understanding of the steps that follow the market entry and of the mechanisms that play a role in this business model adaptation.
For innovation managers and directors of multinational corporations, the new insights in the management of internationalizing an innovative product can help improve the international success of their subsidiaries. It will help managers understand how the release of an innovative product differs from a regular product and how those challenges can be anticipated.
Lastly, I believe it is important to make the European team aware of the challenges the release of an innovative product brings compared to general products, by explaining to them that there might be implementation differences, education plays a bigger role, and production challenges might occur.
6.2 Limitations and future research
Acknowledgments
I would like to thank all respondents for their time during the interviews and for sharing their knowledge. Furthermore, I would like to thank Chris Hintermeister and my supervisor Pedro de Faria for their support, mentoring and recommendations during this research.
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