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PRODUCT INNOVATION STRATEGIES AND COST EFFECTIVENESS ON PURCHASING ENVIRONMENT
The financial crisis of 2008-2009 could be considered to have been the worst financial crisis since the Great Depression of the 1930s. Most economists think that the world economy, especially that of developed countries, can never return to the normal global patterns of consumption, trade and investment of the past decade, and firms will live in a wholly different “new normal” characterized by slow economic growth, high unemployment rates, etc. To cope with this turbulent business environment, right business strategies are the key for success.
However, firms, even within a narrowly defined industry that produces relatively homogenous products or services, often pursue different business strategies. There has been an intense debate on what business strategies firms should take to be successful in the current markets. According to Martin (2009), to be successful in the current market, firms should innovate and explore new ideas so as to design new products for the ever changing markets, whereas many firms do not perform well because they often focus on the business of exploiting past ideas (e.g. production processing and cost-cutting). It has been suggested that product innovation allows firms to develop and maintain a lasting, sustainable competitive advantage (Brown and Eisenhardt, 1995; Porter, 1985; Souitaris, 2001; Stock et al., 2002; Shan and Jolly, 2013; Defélix et al., 2015). On the other hand, cost reduction is considered to be a major strategic choice for firms to compete through lower costs (Mersereau, 2000; Ahire and Devaraj, 2001).
The financial crisis of 2008-2009 and the “new normal” context in the following years have also added complexity in the debate on the right choice of business strategy. Several researchers think that the reorganization of innovative activities appears to be a preferable strategy in the post-crisis context. The work of Jaruzelski and Dehoff (2009) on the 1,000 businesses that spend the most on research and development (R&D) in the world establishes that two-thirds of those studied were able to maintain and even increase their R&D expenditure. Therefore, taking advantage of the crisis in developing new products, while relying on the new paradigms (like that of green growth), appears to be a business practice for most solid businesses. Archibugi et al. (2012) find that the 2008 economic crisis led to a concentration of innovative activities among fast growing and already innovative firms in the UK. However, in an European survey on the impact of the economic crisis on innovation, Archibugi et al. (2013) conclude that the crisis has brought, at least in its initial stage, destruction in innovation investment. According to Colombo et al. (2016), the stock of resources accumulated by larger firms, firm’s innovation and internationalization investments in the pre-crisis period and firms’ cash flow determine the extent of the changes in product innovation and internationalization strategies as firm’s reaction to the crisis.
The results from studies on cost reduction, as a long-term development strategy of businesses in the post-crisis context, tend to be mixed. According to Askenazy et al. (2013), cost reduction allows the firm to carry out a dynamic management of its resources, and this considerably increases its capacity to come out of a crisis. For these authors, cost reduction is presented as the most efficient lever to improve the profitability of the firm. However, Duperrin (2011) notes that firms should not reduce costs during a period of crisis. Instead, they should first question their operational efficiency and work organization. In other words, to spend less does not always mean better production, and failing to pay attention to such an aspect could throw the firm into a negative spiral. According to the study of Cowling et al. (2015), 40 per cent of UK small- and medium-sized enterprises (SMEs) tried to cut costs by downsizing during the recession. Almor (2011) shows, however, that while the downturn forces many Israeli firms to downsize and rethink their business strategies, new opportunities are created, especially for smaller firms, allowing them to reposition themselves.
However, mainly because of the lack of micro data, the literature has not provided solid evidence on why firms are choosing different business strategies when they are operating in the same business conditions. In addition, it has not been clear how the financial crisis has affected the undertaking of business strategies. Moreover, a clear linkage has not been established between firms’ economic performance and the different business strategies, although there have been some anecdotal evidences.
This study aims therefore to bridge the knowledge gaps by using Canadian micro data. In this study, we will focus on two specific long-term business strategies. The first one is product innovation, which is the exploration of new ideas for goods or services positioning (e.g. product leadership, market segmentation, product diversification or improving quality). The second is cost-cutting, which is the exploitation of old ideas for low-price and cost leadership (e.g. mass market).
Our objective is twofold. First, we study the factors that may be important for firms’ decision in pursuing these two different business strategies, and, second, we link these business strategies to firms’ performance. More specially, we address three research questions in this study: RQ1.
What is the most important long-term business strategy (product innovation or cost-cutting) for Canadian firms? Has the undertaking of business strategies changed after the 2008 financial crisis?
What are the factors/predictors for firms to pursue the two different business strategies? Do firm’s size, age, structure, being multinational, and headquarter location play important roles?
Is economic performance (i.e. productivity or profitability) associated with the two business strategies?
The answers to these questions should be of considerable interest to both academics and policymakers. First, it helps to elucidate which factors drive firms to the undertaking of different business strategies. Second, it provides us with a deeper understanding of the role of different business strategies in supporting and strengthening firms’ competitiveness. Third, it can help us design more sophisticated and effective policy initiatives to encourage certain business strategies that are important for firm’s strong economic performance.
The rest of the paper is organized as follows: in Section 2, we review the related literature. Section 3 then describes the data and sets up the regression models. Section 4 discusses the empirical results, whereas Section 5 is the conclusion.
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