Introduction
The trade-off between cost leadership strategy and differentiation strategy is of importance and presents a key challenge to exporters because it is intrinsically related to innovation (Gebauer, 2008; O’Cass et al., 2014). Nevertheless, resources are limited, and firms must make choices in their allocation and determine the extent to which they will emphasize one strategy over another (Danneels, 2007; Lant, Milliken, & Batra, 1992). Although the individual roles of product strategies or innovation capabilities on export performance have attracted considerable attention (e.g., Hortinha, Lages, & Lages, 2011; Lages, Silva, & Styles, 2009), few studies have assessed their integrating impact - that is, the difference in the strengths of the relationships between cost leadership or differentiation strategy and innovation. Drawing on resource based view, we examine how innovation capabilities related with the relationship between cost leadership and differentiation strategies and exporters’ performance. Thus, we consider the moderating role of two distinct capabilities - exploratory innovation and exploitative innovation - on the relationships between product strategies and export performance. Exploratory innovation includes activities aimed to enter new product-market domains, while exploitative innovation activities improve existing product-market domains (He & Wong, 2004). The objectives of this study are to explore (1) impacts of cost leadership strategy and differentiation strategy on export performance, (2) moderating effects of exploitative and exploratory innovation capability on the relationship between product strategy and export performance, and (3) these relationships in the context of a comparison of Korean and Japanese exporters. Most empirical research about product strategy and innovation capability has been conducted in Western-based context. This means that managers operating in non-Western business environments have only Western-based empirical evidence to help them develop strategies for managing levels of market orientation in their international businesses. However, non-Western business cultures may be different from those found in Western firms, and therefore generalizing studies of exporting behavior from Western to non-Western business contexts may be misleading. Indeed, it is noted that there is a need for more studies into the transferability of Western research to the Asian business setting (Ambler, Styles, & Xiucun, 1999). Thus, in order to fill this imbalance, the purpose of this study is to attempt to investigate product strategy and innovation capability of Korean and Japanese firms in international markets.
Conceptual background
Porter (1980) argues that a firm can achieve a higher level of performance over a rival in one of two ways: either it can supply an identical product or service at a lower cost, or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation. A cost leadership strategy is designed to produce goods or services more cheaply than competitors by stressing efficient scale of operation. When a firm designs, produces, and sells a comparable product more efficiently than its competitors as well as its market scope is industry-wide, it means that the firm is carrying out the cost leadership strategy successfully (Campbell-Hunt, 2000). Thus, the primary thing for a firm seeking competitively valuable way by reducing cost is to concentrate on maintaining efficiency through all activities in order to effectively control every expense and find new sources of potential cost reduction (Dess & Davis, 1984). The differentiation strategy provides value to customers with the unique attributes or perceptions of uniqueness, and characteristics of a firm’s product other than cost. The firm pursuing differentiation seeks to be unique in its industry along some dimension that is valued by customers, which means investing in product R&D and marketing (Porter, 1980). Rather than cost reduction, a firm using the differentiation needs to concentrate on investing in and developing such things that are distinguishable and customers will perceive (Gebauer, 2008). Overall, the essential success factor of differentiation in terms of strategy implementation is to develop and maintain innovativeness, creativeness, and organizational learning within a firm (Dess & Davis, 1984; O’Cass et al., 2014; Porter, 1985). A firm’s ability to compete in the long term may lie in its ability to integrate product strategy and its existing capabilities, while at the same time developing fundamentally new ones (Lavie & Rosenkopf, 2006). Simultaneous investments in the exploitation of existing product innovation capabilities and the exploration of new ones may help create a competitive advantage (Soosay & Hyland, 2008). Organizational learning represents the development of knowledge that influences behavioral changes and leads to enhanced performance (Crossan, Lane, & White, 1999; Fiol & Lyles, 1985). Product innovation is a tool for organizational learning and, thus, a primary means of achieving its strategic renewal (Danneels, 2002; Dougherty, 1992; O’Cass et al., 2014). Exploration pertains more to new knowledge - such as the search for new products, ideas, markets, or relationships; experimentation; risk taking; and discovery - while exploitation pertains more to using the existing knowledge and refining what already exists; it includes adaptation, efficiency, and execution (March, 1991). Exploration and exploitation compete for the same resources and efforts in the firm. With a focus on exploring potentially valuable future opportunities, the firm decreases activities linked to improving existing competences (Levinthal & March, 1993; March, 1991). In contrast, with a focus on exploiting existing products and processes, the firm reduces development of new opportunities. However, firms must develop both exploratory and exploitative capabilities because returns from exploration are uncertain, often negative, and attained over the long run, while exploitation generates more positive, proximate, and predictable returns (Levinthal & March, 1993; March, 1991; Özsomer & Gençtürk, 2003). Researchers haveshown that both types of learning are essential to enhancing firm performance (Leonard-Barton, 1992; March, 1991). In this study, we use exploration and exploitation to describe two innovation-related capabilities that are critical elements on the relationship between product strategies and export performance.
Hypotheses
A firm that successfully pursues a cost leadership strategy emphasizes “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on” (Porter, 1980: 35). In addition, with a cost leadership strategy, firms focus on reducing costs through operational efficiency. The associated positional advantage is a cost advantage pertaining to the firms’ value offering and is based on the product’s price–perceived value proposition in the export market. On the other hand, a firm that pursues a differentiation strategy may attempt to create a unique image in the minds of customers that its products are superior to those of its competitors (Miller, 1988). Moreover, a firm may pursue a differentiation strategy by creating a perception in the minds of customers that its products possess characteristics that are unique from those of its competitors in terms of differences in design, physical attributes/features, and durability (Gebauer, 2008). Differentiation strategy aims to generate more outwardly focused product innovations that offer customers product differences that shape a distinctive value offering that is more responsive to their needs (Hughes, Martin, Morgan, & Robson, 2010; O’Cass et al., 2014). The associated positional advantage is a product or market differentiation advantage pertaining to the superior brand, quality, design, and product features that differentiate the firms’ value proposition from its competitors in the export market. Firms that position their products in a manner that co-aligns with their “home country competitive advantages” will, on average, tend to perform better than those that do not. The impact of home-country advantages is lessening over time as firms develop firm-specific global core competencies to replace home-country advantages. The corporate climate in Japanese firms is characterized by worker participation and long term employment. These factors not only tend to increase costs, but also may have a positive effect on product quality through better employee motivation and more knowledgeable workers. Japanese firms have the highest labor and taxation costs and a demand base that is more quality than price sensitive. This creates a home-country environment that favors higher quality. Therefore, Japanese firms most easily achieved a strategic fit with their home country business environment by pursuing a differentiation strategy. On the other hand, Korean firms tend to focus innovation on small, incremental improvements in process and product development, exploiting experience effects. Over time, this focus results in higher quality for Korean products and lower costs, thus creating the potential for Korean firms to use a cost leadership strategy. Moreover, Korea’s capital markets (which offer inexpensive capital below short-term market rates), a demand base that is price sensitive, and the Korean corporate culture’s emphasis on low prices all contribute to an environment favoring lower cost and lower price strategy.
Hypothesis 1: Cost leadership strategy pursued by Korean firms is positively associated with export performance, compared to Japanese firms.
Hypothesis 2: Differentiation strategy pursued by Japanese firms is positively associated with export performance, compared to Korean firms.
From the generation of new ideas through to the launch of a new product, exploration and exploitation play a vital role in product innovation (Rothaermel & Deeds, 2004). Organizations can decide to use existing organizational competences to realize short-term results, or create new competences that may foster the development of innovations in the longer term (Atuahene-Gima, 2005). Both types of capabilities are considered to be dynamic in nature (Winter, 2003), given that their purpose is to transform existing resources into new functional competences that provide a better match for the firm's environment (Voss, Sirdeshmukh, & Voss, 2008). Although both exploitative and exploratory capabilities related to cost leadership and differentiation strategies, because of those different roles of capabilities in innovation process, the effects of those innovation capabilities on the relationship between product strategy and export performance might be different. In case of cost leadership strategy, firms focus on using and developing existing capabilities, promoting improvements in existing components and building on existing technological elements (Benner & Tushman, 2003; Rust et al., 2002). Similarly, exploitative innovation is aimed at improving existing product-market domains. The cost leadership strategy creates value through existing competences or competences that have been slightly modified (Voss et al., 2008). It promotes a routine-based and repetitive approach to organizational changes (Rust et al., 2002). Because exploitative innovation builds on existing knowledge and extends existing products and services for existing customers (Soosay & Hyland, 2008), exploitative capabilities helps firms pursuing cost leadership strategy to reap the benefits of improvement they make to their products and to continue making incremental improvements (Brucks, Zeithaml, & Naylor, 2000), which are designed to allow the firm to continue its superior performance (Griffin, 1997). Compared to cost leadership strategy, differentiation strategy is characterized by radical change, risk and experimentation and that allows for the creation of new methods, relationships, and products. Because exploration focuses mainly on trying to create variety, to adapt and hence exploit ever-decreasing windows of opportunity (Soosay & Hyland, 2008), this capability is more beneficial to the kind of product innovativeness to the firm (Augusto & Coelho, 2009). When exporters pursue differentiation strategy for acquiring new knowledge and developing new products and services, exploratory capability helps to engage new insight into the design of new features and benefits of a given product, that product is guaranteed to contain new ideas (Cho & Pucik, 2005; Yalcinkaya et al., 2007). In contrast with exploitation aimed at improving existing product-market domains, explorative innovation requires fundamental changes in the way an organization operates and represents a clear departure from existing practices (Menguc & Auh, 2006).
Hypothesis 3: Exploitative innovation capability moderates the relationship between cost leadership strategy and export performance positively.
Hypothesis 4: Exploratory innovation capability moderates the relationship between differentiation strategy and export performance positively.
Results
This study conducted survey data from Korean and Japanese exporters, regarding to product strategy, innovation capability, and export performance. 223 usable questionnaires were obtained in Korea, and 124 usable questionnaires were obtained in Japan. With regard to number of years of international experience, international experience averaged 15 (S.D. = 23.54) for Korean samples and 37.95 (S.D. = 21.90) for Japanese samples. In addition, export intensity by total sales over exporting sales averaged 15 (S.D. = 23.54) for Korean samples and 36.91 (S.D. = 26.15) for Japanese samples. Using survey data from Korean and Japanese exporters, the findings indicate that cost leadership strategy enhance export performance for Korean firms. On the other hand, for Japanese firms, differentiation strategy is more related on export performance positively. Moreover, exploitative innovation capability strengthens the relationship between cost leadership strategy and export performance, while exploratory innovation capability enhances the link between differentiation strategy and export performance for both Korean and Japanese firms.
Discussion
Focusing on product strategy through the application of the RBV has provided theoretical insights as well as empirical evidence as to which capabilities are required to achieve these critical product strategy outcomes. The support from this study provides further evidence of the usefulness of applying the RBV to the export setting and should encourage researchers to examine the other aspects of export strategy. Based on organizational learning perspective, in addition, this study found that exploratory and exploitative innovation capability are essential to the firm because they act as vehicles for renewing product strategy to achieve superior export performance. By considering product strategy with exploration and exploitation simultaneously, we present a new perspective of the roles of these product strategies in the development of firms’ innovation capabilities. Our results indicate that cost leadership and differentiation strategy are pivotal in ensuring a proper balance between exploratory and exploitative innovations. Furthermore, this study found that different effects of product strategies on export performance in line with home country competitive advantages. Understanding the nature of marketing strategies employed by Korean and Japanese firms as well as its different effects may provide a useful reference point for exporters from other emerging countries in Asia. One of the main implications for managers is that both exploratory and exploitative product competences should consider in parallel when developing product strategy. The findings underscore the need for managers to invest in cost leadership and differentiation strategy to ensure the development of exploration and exploitation. Therefore, resource allocation decisions should, consider the firm's needs for innovation capabilities and, on the other hand, be guided by the firm’s product strategy. Exporters operate in highly complex environments, characterized by high levels of technological and market uncertainties and highly diverse and dispersed customers (Kleinschmidt et al., 2007; Mohr & Sarin, 2009). Therefore, in addition to the product strategy toward the development of innovations using state-of-the-art technologies, managers of these firms need a similarly strong focus on understanding both current and potential exporting markets. By acknowledging the need for product strategy, managers can ensure the balanced innovation capabilities.

• Insik Jeong(Korea University Business School, Republic of Korea)
• Jong-Ho Lee(Korea University Business School, Republic of Korea)
• Eunmi Kim(Pusan National University, Republic of Korea)