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Balancing standardization and adaptation for product performance in international markets: testing the influence of headquarters--subsidiary contact and cooperation (1).

Abstract

* We examine how MNCs balance standardization and adaptation in their international product designs. Specifically, we investigate how inputs from both a firm's headquarters and its foreign subsidiaries, together, shape the standardization-adaptation balance for the product's superior market performance.

* Our survey of 128 products in the foreign markets of 62 MNCs reveals that a standardization-adaptation balance, when shaped through face-to face contact between headquarters-subsidiary managers, positively influences product performance. Additionally, headquarters-subsidiary co-operation enhances this influence on performance.

Key Results

* This paper provides evidence of how joint inputs of headquarters and subsidiaries make the standardization adaptation balance effective in international products.

Introduction

When introducing products in international markets, weighing the benefits of standardizing products across country markets versus adapting them to the differences among markets is often a significant concern to multinational companies (MNCs). Researchers have long debated the standardization-adaptation quandary (see Cavusgil/Zou/Naidu 1993, for a review). One side of this debate contends that standardizing products across country markets is not only desirable because of efficiency considerations, but also feasible because of the growing homogenization of country markets (Hout/Porter/Rudden 1982, Levitt 1983, Ohmae 1985). The other side in this debate, skeptical about both the benefits and the feasibility of standardization, cites the many intractable cultural, political, and economic differences among countries, and makes a strong case for adapting these products to local market requirements (Boddewyn/Soehl/Picard 1986, Quelch/Hoff 1986).

Since the late 1980s however, both standardization and adaptation are believed to be equally important, and companies have been encouraged to balance these conflicting requirements in their international product designs (Cavusgil et al. 1993, Wind/Douglas 1987). While all international products are not designed with this objective, the proportion of international products that balance standardization and adaptation appears to be growing (Takeuchi/Porter 1986) and anecdotes justifying the merits of balancing standardization and adaptation come from a spectrum of industries. These include food and cosmetics (where adaptation would appear to be important) along with copiers and televisions (where standardization would appear to be critical) (e.g., Bartlett/Ghoshal 1989, Takeuchi/Porter 1986, Subramaniam/Rosenthal/Hatten 1998). The logic being that, by balancing standardization and adaptation, MNCs can not only simultaneously harness the benefits of efficiency and responsiveness (Prahalad/Doz 1987, Morrison/Roth 1992), but also coalesce into their products, inputs of both headquarters and foreign subsidiaries for greater competitive advantage (Subramaniam/ Venkatraman 2001).

Our understanding, however, of how MNCs effectively balance standardization with adaptation in their product designs remains limited, despite the notable research attention the standardization/adaptation debate has attracted. Partly, this is because this debate has disproportionately channeled research to either establish the prevalence or dearth of standardization across markets (e.g., Boddewyn et al. 1986, Samiee/Roth 1992), or to delineate the contingencies influencing the likelihood of standardization or adaptation (e.g., Cavusgil et al. 1993, Jain 1989). Consequently, while this research gives us a good understanding of the conditions under which MNCs are more likely to either standardize or adapt their products, it provides few insights on how MNCs balance standardization with adaptation. This gap in our understanding is of concern, given the current thinking that standardization and adaptation are not necessarily either/or choices solely governed by product, market or technology contingencies. Indeed, there is a clear need to systematically assess how MNCs can balance standardization with adaptation for higher product performance despite industry related contingencies across product markets (Bartlett/Ghoshal 1989).

Furthermore, most studies have examined standardization and adaptation at the aggregate level of the marketing mix (Jain 1989, Szymanski/Bharadwaj/ Varadarajan 1993). Few have specifically focused on the product and its design--mingling the international product with its promotion, pricing and distribution in their analysis. Hence, the question of how some MNCs more effectively balance standardization with adaptation in their international product designs remains largely unexamined. This gap is particularly disconcerting, given the increasing competitive significance of product designs for MNCs in their tussle for market share in closely contested international markets (Nonaka/Takeuchi 1995).

In this study we direct attention to how MNCs balance standardization with adaptation in their international product designs and investigate its influence on the product's competitiveness in international markets. We focus on how headquarters and subsidiary inputs jointly shape the standardization-adaptation balance and examine how a MNC's knowledge and experience base, distributed amid its headquarters and subsidiaries, are brought to bear in designing the standardization-adaptation balance. More specifically, we concentrate on the role of direct face-to face contact between, and cooperation among, headquarters and subsidiary managers in influencing the effectiveness by which MNCs balance standardization-adaptation in their international products. We determine the effectiveness of how MNCs balance standardization-adaptation based on product performance in international markets.

Background

A MNC's ability to generate and deploy superior knowledge across country markets has long been recognized as a key element of its competitiveness. Early thinking however put much of the onus for knowledge generation and its deployment on the MNCs' headquarters (e.g., Caves 1971, Vernon 1966). According to this traditional view, subsidiaries were stylized as passive recipients of the MNC's home country or "ownership" advantages (Dunning 1988). In fact, the efficient deployment of their home country knowledge through the "internalization" of intangible assets, was professed as the principal logic for the very existence of MNCs (Buckley/Casson 1976, Hymer 1960, Teece 1981).

More modern thinking however views the knowledge generating potential of MNCs to span country borders. According to this perspective, subsidiaries are not just passive recipients of home country knowledge, but active participants in the process of creating a global repository of new knowledge (Birkinshaw/Hood 2001, Furu 2000, Frost 2001). As a result, the principal source of competitive advantage of MNCs is now reckoned to be their ability to generate new knowledge through the stimuli and resources of diverse heterogeneous environments (Cantwell 1992, Subramaniam/Venkatraman 2001).

Our inquiry into how MNCs balance standardization with adaptation of international products is based on this new line of thinking. That is, we see an international product as a platform for headquarters and subsidiaries to jointly generate new knowledge (Lindqvist/Solvell/Zander 2000). We also see the standardization-adaptation balance in this product as an expression of the sharing and assimilation of headquarters-subsidiary inputs.

Research Framework

A basic premise of our study thus is that the effectiveness by which MNCs balance standardization and adaptation is a function of how inputs from both headquarters and subsidiaries are leveraged for designing the balance. Inputs from headquarters are critical as headquarters managers invariably are in a central position to synthesize inputs from their global network and the most likely sources of knowledge about what features could be standardized in the product design. Similarly, inputs of the concerned overseas subsidiaries are also critical, as subsidiary managers are generally well positioned to absorb and possess knowledge about local market conditions (Birkinshaw/Hood/Jonsson 1998, O'Donnell 2000). Bartlett and Ghoshal (1989) describe the process of balancing standardization-adaptation as "transnational"--its effectiveness depending on the extent to which unique and differentiated strands of expertise accumulated by both headquarters and subsidiaries get assimilated into the MNCs' products.

This premise consequently leads us to examine two aspects of how MNCs balance standardization with adaptation. The first concerns a physical manifestation of a balance--that is, the extent to which product features reflect both adaptations to unique country requirements and standardization across markets. The second concerns the degree of inputs from both headquarters and subsidiaries in arriving at product features manifesting the balance. We focus on these two aspects as we believe that predicting the effectiveness of standardization adaptation balances in international products, necessitates considering both the physical manifestation of a balance in the product design and how headquarters and subsidiary inputs get assimilated into the balance. Our assertion is that while the physical manifestation of product features reflecting a balance in standardization-adaptation balance is required (2) for estimating the effectiveness of international products, it is not a sufficient condition. This is because the physical manifestation of a balance per se does not reflect the extent of headquarters-subsidiary inputs that go into its creation.

Take for example three international products, A, B, and C, each physically manifesting a similar balance between standardization and adaptation. That is, for each product, there are a comparable number of design features representing both standardization and adaptation. However, product A is designed with very little inputs from subsidiaries, with headquarters managers making their own inferences about overseas market requirements and the product's features that adapt to them. Product B is designed with little inputs from headquarters, with the subsidiary making their own assumptions about the features that headquarters may want to standardize across markets. In contrast, the combined inputs of headquarters and subsidiary managers create product C's design features; their cumulative insights shaping the standardization-adaptation balance.

We contend that, despite products A, B and C physically manifesting comparable standardization adaptation balances, product C is more likely to outperform products A and B when introduced in the concerned international market. This is because product C better "embodies" the distinctive expertise of both headquarters and the concerned subsidiary (Madhavan/Grover 1998). Its development more closely epitomizes a "transnational" process, with the benefits of efficiency (through standardization) and responsiveness (through adaptation) being harnessed by coalescing the unique and essential know-how of headquarters and subsidiaries respectively (Bartlett/Ghoshal 1989). Products A and B, in comparison, do not deploy the distinctive expertise of headquarters and subsidiaries to the same extent and hence will not as effectively leverage the benefits of efficiency and responsiveness, and consequently not be as competitive in the international market. To capture the impact of this important driver of effectiveness in our analysis thus, it is necessary to not only the physical manifestation of the standardization-adaptation balance, but also factor in the extent to which headquarters-subsidiary inputs are shared and assimilated to shape that balance.

Hypotheses

One approach for headquarters and subsidiaries to share their respective inputs when balancing standardization and adaptation in their product design is through direct face-to-face contact among their managers (Egelhoff 1991, Ghoshal/Korine/Szulanski 1994, Gupta/Govindarajan 2000). Direct face-to-face contact, which we see as a consequence of subsidiary managers' visits to headquarters, enriches the media for knowledge exchange, making it possible for headquarters and subsidiary managers to discuss, intricate nuances of their unique perspectives for product designs (Daft/Lengel 1986, Subramaniam et al. 1998, Nonaka/ Takeuchi 1995). Direct face-to-face contact also socializes these managers, providing them with a strong platform to share their knowledge and to leverage a broader base of perspectives and a wider set of alternatives when balancing standardization and adaptation in their product designs (Nonaka 1994, Takeuchi/ Porter 1986). According to Grant (1996), such knowledge exchange enhances the scope and flexibility of knowledge integration--or, the breadth and depth of knowledge that organizations can access for assimilating multiple inputs and sources of knowledge.

A standardization-adaptation balance in an international product developed through high direct face-to-face contact among headquarters and subsidiary managers is thus more likely to have assimilated rich insights and inputs from both headquarters and subsidiaries (Madhavan/Grover 1998, Subramaniam et al., 1998). On the other hand, a standardization-adaptation balance developed with little direct face-to-face contact between headquarters and subsidiary managers is unlikely to have factored in inputs from both headquarters and subsidiaries in any meaningful way. We expect thus that, when the physical manifestation of the standardization-adaptation balance in the product design and the level of headquarters-subsidiary direct face-to-face contact are both high, product performance in the individual international markets will be enhanced. Hence:

Hypothesis 1 (H1). The joint effects of the physical manifestation of a balance between standardization-adaptation in the product design and headquarters-subsidiary manager direct face-to-face contact will positively influence product performance in international markets.

A different level of analysis for assessing the cross-border sharing of inputs concerns the context in which the face-to-face contact between headquarters and subsidiary managers occurs to share and assimilate each other's knowledge. A context of high cooperation--reflected in the openness of communication, similarity in goals, and a culture of give and take among headquarters and subsidiary managers--influences the motivation among subsidiary and headquarters managers to share their knowledge and further facilitate their knowledge exchange (Hoopes/Postrel 1999, Nonaka 1994, Bartmess/Cerny 1993). Such a context, allowing for an open sharing of knowledge assumes importance, as headquarters and subsidiaries often have major differences in their cultures, objectives, and decision-making premises (Perlmutter 1969, Roth/Nigh 1992).

The process of balancing standardization and adaptation is a particularly thorny issue for headquarters and subsidiary managers, and is known to accentuate their divergence in objectives (Bartlett/Ghoshal 1989). While headquarters managers generally press for standardization to enhance their company's overall global position, subsidiary managers typically look for unique and adaptive product features to benefit their local market position. (3) In such a setting, embarking upon the standardization-adaptation balance problem to achieve a "win-win" solution enhances the effectiveness of the process.

Co-operation among headquarters and subsidiary managers facilitates the likelihood of achieving "win-win" scenario. That is, when headquarters-subsidiary manager contact for designing the standardization-adaptation balance occurs in a context of high cooperation, we can expect a more open and forthcoming sharing of their corresponding inputs. We can also expect these managers to more willingly perceive complementary needs and constraints, and arrive at a blend of design features that leverages a broader set of views, ideas and creative solutions (Nonaka/Takeuchi 1995). This should strengthen the degree of cross-border knowledge assimilation they harness in the standardization-adaptation balance and consequently the product performance they achieve. Conversely, when headquarters-subsidiary manager contact occurs in a context of low cooperation, we do not expect managers to be entirely forthcoming in sharing their knowledge or be accommodating in accepting inputs and suggestions. In such a context these managers are unlikely to fully leverage their ideas, thoughts and views about likely feature options in their product design. A context of low cooperation thus weakens the degree of cross-border knowledge assimilation they harness in the standardization-adaptation balance, and consequently impairs the product performance they achieve. Hence:

Hypothesis 2 (142). The influence of the joint effects of the physical manifestation of a balance between of standardization- adaptation in the product design and headquarters-subsidiary manager direct face-to-face contact on product performance will be stronger when headquarters-subsidiary cooperation is high and weaker when headquarter-subsidiary cooperation is low.

Figure 1 schematically represents our research framework.

[FIGURE 1 OMITTED]

Research Methods

We used a cross-sectional survey of key informants to collect primary data from a set of foreign subsidiaries of US-based MNCs for our research. The survey was administered to subsidiary managers knowledgeable of the implementation of product marketing practices and responsible for the introduction of products in their respective markets. We asked these informants to focus on one specific product and its corresponding geographic market (our unit of analysis) when responding to our survey.

Sampling and Survey Procedure

To select a sample of key informants, we first identified hierarchies of US-based firms using the International Directory of Corporate Affiliations (1997), and then selected firms with foreign subsidiaries to contact. Second, we placed telephone calls to each US corporate headquarters so as to identify marketing managers in foreign subsidiaries and assess their ability to serve as key informants. Our final target sample of contained three hundred and sixty-six key informants in three hundred and fifty-three foreign subsidiaries of one hundred and twenty-three US-based firms. In thirteen cases, two informants (with responsibilities for different products) were identified at the same subsidiary.

We sent a questionnaire, cover letter, and a reply envelope to each of the identified key informants in these subsidiaries. Based on Dillman (1978), we sent follow-up reminder post cards to non-respondents after three weeks. This was followed by two additional sets of follow-up questionnaires after six weeks and ten weeks respectively. As an incentive for their participation, we offered respondents a summary report of the findings from the completed study. Out of 366 potential subsidiary manager responses we received 128, for a response rate of 36 percent. Each one of these responses represented a distinct product. These responses came from 108 foreign subsidiaries in 35 countries, representing 62 MNCs.

Non-response Bias Check

We tested for non-response bias in our data using procedures recommended by Armstrong and Overton (1977). A comparison of the mean values of all the variables in the responses from the first, second and the third mailings showed no significant differences (p-values ranged from 0.20 to 0.87). Additionally, comparisons of secondary data on subsidiary characteristics (number of employees, subsidiary sales) for responding and non-responding firms obtained from America's Corporate Families and International Affiliates (1998) also revealed no significant differences (p [less than or equal to] 0.77 and p [less than or equal] 0.43 for employees and sales respectively).

Inter-Rater Agreement

We also tested for inter-rater agreement by calculating a Pearson product moment correlation across questionnaire items that were not brand-specific for each pair of respondents from the same subsidiary. The average correlation across all pairs of respondents was 0.92, with correlations ranging from 0.64 to 0.99. This high level of inter-rater agreement provides some support for the assumption that the responses of the key informant are representative of subsidiary information.

Measures

Wherever possible we adapted pre-existing measures to the context of this study; in other cases we developed new measures. All measures were pre-tested for content validity with academic experts and marketing managers by sending draft questionnaires and then debriefing participants via telephone after we received their comments (see Appendix 1 for a listing of all the measures).

The measure for the dependent variable, namely, product performance in its respective international market, was operationalized as the reported market share of the product over the most recent annual period. Market share has been used consistently in research assessing product and brand-level performance (Roth 1995, Szymanski et al. 1993).

Our conceptualization of direct face-to-face contact between headquarters and subsidiary managers is rooted in the notion that such contact enhances the richness of communication (Daft/Lengel 1985, Subramaniam et al. 1998). Moreover, this richness of communication is enhanced when the direct contact is over long periods of time (Nonaka 1994). Accordingly, we operationalized this variable as the number of days, on average, marketing managers from each subsidiary spent at the firm's headquarters per year. This operationalization is consistent with that discussed by O'Donnell (2000). We conceptualized headquarters-subsidiary cooperation as a facilitator of open communication and sharing of cross-border inputs. Accordingly, we used a scale adapted from Song, Montoya-Weiss, and Schmidt (1997) asking respondents to rate their subsidiary's product management activities in terms of their openness of communications, the similarity in goals, satisfaction in interactions, and give and take they had with headquarters.

We operationalized the physical manifestation of a balance between standardization and adaptation by developing a new measure. The idea was to get an indication of the physical manifestation of a standardization-adaptation balance in terms of product features being both adapted and standardized. We accordingly asked respondents to indicate on a five-point scale the extent to which the product design was customized by the particular subsidiary's marketing operation versus being standardized by the firm's headquarters. We re-coded these responses as follows: completely standardized (previous rating of 1) = 1; completely customized (previous rating of 5) = 1; 75% standardized/25% customized (previous rating of 2) = 2; 75% customized/25% standardized (previous rating of 4) = 2; and 50% standardized/50% customized (previous rating of 3) = 3. The highest response of this re-coded measure thus was when the design had the highest balance between standardization and adaptation; the lowest response was when the product design had the least balance (either complete standardization or complete adaptation).

Control Variables

We used several control variables in our empirical models. Three of these were chosen to control for the influence of the characteristics of the subsidiary and its market on product success. These include: subsidiary size, operationalized as the total number of employees (Quester/Conduit 1996); technological turbulence in the subsidiary market, measured by a scale rating the technology behind the products on frequency of change, difficulty in forecasting, and the number breakthroughs (Menon/Jaworski/Kohli 1997); competitive intensity in the subsidiary market, assessed by a scale rating the competition in terms of being cutthroat, price competitive, ready to match competitive offers and ease of awareness of new competitive moves (Szymanski et al. 1993). The next three variables were chosen to control for contingent factors that influence the likelihood of the product being adaptive or standardized. One, the economic distance of the subsidiary market, was calculated from gross domestic product (GDP) per capita data (Terpstra 1988); the logic being that greater economic distance is more likely to influence adaptation, whereas lesser economic distance is more likely to influence standardization (Jain 1989). The second, the nature of the product--whether a durable, non-durable or a service--was controlled for following Subramaniam and Venkatraman (2001) with two dummy variables. Again the logic we employ suggests that differences among these product characteristics are likely to influence standardization and adaptation (Cavusgil et al. 1993). Note that our sample contains 56 firms in the durables group (e.g., automobiles, elevators, tractors), 79 firms in the nondurables group (e.g., beverages, cosmetics, pet food), and 8 firms in the services group (e.g., telecommunications and software development). The third, the interdependence of the subsidiary with all other sub-units of the MNC, assessed using a scale with eight indicators rating interdependence across several facets (Astley/Zajac 1990). For example the scale rated how much the subsidiary influenced the outcomes of other subsidiaries, how much it relied on other subsidiaries for is functioning, how coordinated its work was with other subsidiaries, and the extent to which tasks in the subsidiary were jointly managed with other subsidiaries. These aspects of interdependence are known to have an influence on standardization/adaptation (Bartlett/Ghoshal 1989), and hence used as control variable. Finally, we used key informant subsidiary experience, operationalized as the number of years (4) the respondent has been in the subsidiary (Cavusgil et al. 1993) to control for any possible influence of informant experience on the responses to our survey.

Tests for Reliability and Validity of Measures

To assess the content validity of our measurement scales, we conducted a smaller-scale study following procedures similar to those recommended by Zaichkowsky (1985) and Netemeyer, Boles, and MacMurrian (1996). Using this procedure, we identified expert judges with experience doing key informant research and asked them to rate the degree to which each item represented the constructs in our study. These expert judges rated each item as "clearly representative," "somewhat representative," or "not representative" of the construct of interest. Across all items, mean responses were greater than 2.0 (i.e., somewhat representative), and in all cases at least 82 percent of judges indicated their perception that the item was at least somewhat representative. Given that Zaichkowsky (1985) suggests that an 80 percent level of agreement is sufficient in determining item representativeness, our measures have good content validity.

Reliability and discriminant validity were assessed for all scaled multiple-item measures (i.e., headquarters-subsidiary cooperation, technological turbulence, competitive intensity and horizontal interdependence) using procedures recommended by Anderson (1987). As depicted in Appendix 1, with one exception (the control variable competitive intensity (5)), Cronbach's Alpha for all final scales exceeded 0.70, providing evidence of reliability (Peter 1979). Additionally, composite reliability scores based on the item-loadings from confirmatory factor models ranged from 0.68 to 0.87 (for these same variables). Discriminant validity was assessed using the procedure recommended by Gerbing and Anderson (1988). Confirmatory factor models with two factors involving each possible pair of constructs were run. In the first model, the do coefficient was constrained to 1.0, and then was estimated freely in the second model. In each case, the model with the free [phi] coefficient was found to be superior to the model with the fixed [phi] coefficient using a chi-square difference test. The results of these analyses are summarized in Table 1.

Analyses and Results

Table 2 provides the summary statistics and correlations for all the variables included in the study. We used regression analysis to assess support for the hypotheses. We also computed the variance inflation factors (VIFs) for all the variables. The largest of the resulting VIFs was 2.70, well below 10--the level suggested by Mason and Perreault (1991) to signal detrimental multicollinearity. Table 3 shows the results of the regression models along with the standardized parameter ([beta]) estimates as well as their p-values in parentheses. Model 1 in Table 3 shows the effects of the control variables. Together they explain a significant variance (p < 0.01) in product performance and hence contribute in controlling for effects other than our hypothesized independent variables. It is interesting to note that the control variable competitive intensity remains highly significant (p < 0.001) across the regression Models 1-5 indicating its relative importance compared to the other variables in controlling for "other effects" while explaining the variance in the dependent variable.

Tests of Hypotheses

Hypothesis 1 predicts that the joint effects of the physical manifestation of a balance in standardization and adaptation and headquarters-subsidiary direct face-to-face contact and will be positively associated with the product performance in the subsidiary's market. As shown in Table 3, the coefficient for the joint effects in Model 3 is significant ([beta] = 0.476; p < 0.05). These results support Hypothesis 1.

Hypothesis 2 predicts that at high levels of cooperation, the influence of the joint effects of the physical manifestation of a balance in standardization-adaptation and headquarters-subsidiary direct face-to-face contact on product performance will be stronger than at low levels of cooperation. To test this prediction we used sub-group analysis (6) and divided our sample based on the mid-point of the seven-point scale for the headquarters-subsidiary cooperation measure, or at four. We then compared the relative influence of the joint effects of headquarters-subsidiary direct contact and balance in standardization-adaptation on product performance in each of these sub-samples--of high and low headquarters-subsidiary cooperation respectively. (7) According to Chow (1960), this approach of using a sub-group analysis can be used to assess equivalence of regression coefficients between two samples. More specifically, the Chow Test can be used to assess whether or not two sets of data (e.g., from two samples) contain significantly different regression coefficients (Gujarati 1995, Studenmund 1997).

Model 4 in Table 3, lists the standardized regression coefficients and p-values for the low headquarters-subsidiary cooperation group, and Model 5 lists them for the high headquarters-subsidiary cooperation group. The coefficient of the joint effects of headquarters-subsidiary direct contact and standardization-adaptation balance on product performance is stronger in the high cooperation group ([beta] = 0.548; p < 0.07) as compared to the low cooperation group ([beta] = 0.209; p < 0.689). Additional support for the differences in the low and high cooperation groups is provided by the Chow test comparing the regression coefficients for the two groups, which resulted in an F-statistic of 1.82 (d.f. = 13, 113) (p < 0.05). While this test represents a comparison of all coefficients in the models, a comparison of the coefficients for the joint effects of headquarters-subsidiary direct contact and standardization-adaptation balance on product performance reveals a non-significant relationship for the low cooperation group, and a relationship that is significant at p < 0.07 for the high cooperation group. Taken as a whole, these results provide support for Hypothesis 2. In summary thus, we find both our hypotheses supported by our results.

Additional Analyses and Results

To further ascertain the validity of our regression results we reanalyzed our data using ANOVA. We created a grid wherein our responses fell into one of four categories--high/high, low/low, high/low and low/high--of standardization-adaptation balance and headquarters-subsidiary contact respectively. We transformed our measure of headquarters-subsidiary contact using a median split of our data with observations above the median representing "high" values and observations below the median representing "low" values. We ran an analysis of variance with our control variables as covariates, the new headquarters-subsidiary contact and standardization-adaptation balance variables as factors, and product success as the dependant variable. The interaction term between standardization-adaptation balance and headquarters-subsidiary contact was significant at p [less than or equal to] 0.014 (F-statistic = 4.40). In addition, the main effects of standardization-adaptation balance and headquarters-subsidiary contact each remain non-significant, consistent with our regression analyses (F-statistic = 0.024; p [less than or equal to] 0.88 for level of contact and 0.243; p [less than or equal to] 0.79 for standardization-adaptation balance).

An examination of the means for the different groups revealed an interesting pattern. Higher levels of performance were observed when both standardization-adaptation balance and the level of headquarters-subsidiary contact were high (mean market share = 27.22). Mean market share with low standardization-adaptation balance--high headquarters subsidiary contact, and high standardization-adaptation balance--low headquarters subsidiary contact were 20.31 and 20.54, respectively. However, we also found high levels of performance when both standardization-adaptation balance and the level of headquarters-subsidiary contact were low (mean market share = 28.02), implications of which we discuss in the next section.

Discussion

Our findings provide new insights on how MNCs effectively balance standardization with adaptation in their international product designs. We find that a balance between standardization and adaptation shaped through direct contact between headquarters and subsidiary managers positively influences product performance in international markets. We also find this positive influence to be strengthened by headquarters-subsidiary cooperation. These findings draw attention to the critical importance of assimilating headquarters-subsidiary inputs for effectively balancing standardization-adaptation in international product designs.

Our evidence reveals that the physical manifestation of a balance between standardization and adaptation in the product design alone does not lead to product performance. We believe this is because such a balance, achieved without a proper exchange of headquarters-subsidiary inputs, does not truly embody the distinctive expertise that the headquarters and subsidiary managers possess. Thus we find that international products, that do not assimilate and embody the combined inputs of both headquarters and subsidiaries, do not perform as well as products doing so--even if they have features that reflect both standardization and adaptation. The assimilation of the combined inputs of both headquarters and subsidiaries into the product's standardization--adaptation balance, critically determines product performance in a subsidiary market.

We also find evidence that headquarters-subsidiary cooperation further facilitates the assimilation of cross-border inputs, as it enables people to openly share their knowledge and accept different viewpoints (Bartmess/Cerny 1993, Nonaka/Takeuchi 1995). Prior research has conjectured such an influence. For example, Hoopes and Postrel (1999) have speculated that cooperation among product development team members enhances shared and integrative knowledge and thereby could reduce the number of glitches in the product designs. Similarly, Bartlett and Ghoshal (1989) provide anecdotal evidence implying the significance of cooperation among Procter and Gamble's European headquarters and subsidiaries in successfully developing a new laundry detergent that balanced standardization with adaptation. Our findings validate these suppositions--of cooperation influencing the effective assimilation of cross-border inputs--more systematically over a broad sample.

Our re-analyses using ANOVA while supporting our regression results gave us some new and additional insights. While we find a high standardization-adaptation balance and high headquarters-subsidiary contact jointly influence product success (reinforcing our regression results), we also find that a low standardization-adaptation balance and low headquarters-subsidiary contact is associated with product success. These results imply a "fit" logic consistent with information processing theory (Galbraith 1973)--which suggests that high uncertainty tasks (such as achieving a high balance in standardization-adaptation) need rich information processing mechanisms (such as high headquarters-subsidiary contact) whereas low uncertainty tasks (such as implementing a low standardization-adaptation balance) only requires lean information processing mechanisms (and hence low contact). Performance is high as long as there is a match between uncertainty and information processing capacity (Tushman/Nadler 1978)--a mismatch is associated with lower performance. The implication of these results is that balancing standardization-adaptation is a strategic choice for MNCs, and if they choose not to launch products with a standardization-adaptation balance they may be better off by minimizing headquarters-subsidiary contact for that product's marketing. However, to achieve an effective standardization-adaptation balance (the focus of our inquiry), MNCs need both a high balance in standardization-adaptation and high headquarters-subsidiary contact, a core finding of our study.

As with most empirical research, these findings should be taken in the context of the limitations of the study. One limitation of this study is the use of a single informant. However, as the study focused on very specific activities at the level of the product (unlike broader issues like organizational culture where there could be considerable heterogeneity among different sub-units), and collected information from a knowledgeable subsidiary manager, the general weakness associated with a single informant is mitigated (Venkatraman/Grant 1986). A second related problem could be a common method bias. Nonetheless, considering that the hypotheses were based upon joint and moderating effects rather than main effects, it is unlikely that the common method bias would have influenced the results. In other words, it is unlikely that managers had a "joint effect or moderation-based theory" in their minds that could be systematically biasing their responses and these results (Subramaniam/Venkatraman 2001).

Another limitation is that we used only one measure of performance. However, we used procedures similar to those employed by Moorman and Miner (1997), in that respondents were asked to rate the extent to which a particular product achieved a number of outcomes related to profitability, sales and market share over the most recent annual period. This additional measure of performance collected was found to be correlated significantly with our measure of market share (Pearson correlation = 0.38; p [less than or equal to] 0.01). While additional objective firm performance measures and/or external secondary data would have been desirable, brand performance in foreign markets is not reported widely, and, hence extensive secondary data are not available. We also recognize that with a large sample design testing a large cross-section of international products across several countries, it is difficult to get precise measures of the "quality" of standardization-adaptation balances and the nature of inputs being shared, that could have got by using small sample case studies. We believe however that our test is conservative and despite measures designed to get information across large cross-sections our results are robust and revealing.

Contributions and Future Research Directions

By factoring in the extent to which headquarters-subsidiary inputs are assimilated in the process of balancing standardization and adaptation, this is the first study to empirically demonstrate how balancing standardization/adaptation provides MNCs competitive edge in terms of product performance in international markets. Prior research has mostly focused on identifying contingencies, such as, the nature of overseas markets, industry characteristics, or, the technology of the product, to explain the likelihood of international products being either standardized or adapted. A few exceptions (e.g., Samiee/Roth 1992) that investigated the performance implications of standardizing international products, failed to find positive results.

Our findings, which are the first positive results to be reported, emphasize the benefits of discerning how MNCs effectively balance adaptation and standardization of international products, rather than validating the feasibility or desirability of total standardization or adaptation. The findings imply that the primary benefit of balancing standardization-adaptation stems from the platform it offers for headquarters and subsidiaries to integrate and harness their unique and differentiated knowledge. It is also important to note that this benefit applies to MNCs competing in a wide range of industries and product categories, and balancing standardization and adaptation can be a valid strategic choice across industries. The study thus implores for a re-direction of research: from that of substantiating the prevalence of standardization or adaptation, or establishing a fit between standardization/adaptation and industry/product categories, to one that investigates how companies effectively assimilate headquarters-subsidiary inputs in their international products. Such a re-direction also presents new research avenues. For example, our study viewed standardization-adaptation from a subsidiary's perspective--and, focused on international products introduced in single subsidiary markets. Future studies could take a headquarters perspective, and examine the influence of assimilating inputs from and across multiple overseas sources when simultaneously introducing products in multiple country markets (Yip 1995).

Our study also has some managerial implications. It suggests that managers can effectively balance standardization and adaptation in their products irrespective of the industry they are in provided they facilitate the sharing of inputs from both headquarters and subsidiaries. Having regular cross-border visits and headquarters-subsidiary cooperation in the product development process is important and efforts should be directed to encourage such practices when balancing standardization and adaptation for international markets. Our analyses also suggest that balancing standardization and adaptation is a strategic choice for MNCs, and not all international products require balancing standardization and adaptation. In such cases cross-border visits and expensive measures to enhance cooperation could be wasteful allocation of resources and not beneficial for those products.

In conclusion, our study demonstrates the significance of assimilating headquarters-subsidiary inputs to effectively balance the standardization and adaptation of international products. In doing so it offers new insights and research avenues for examining how MNCs could enhance product performance in international markets.

Appendix 1. Measurement Items

1. Product performance

For the most recent annual fiscal period, please estimate the market share accounted for by the brand/product indicated on page 1. To standardize responses, consider market share as sales of a brand/product as a percentage of the total sales in the market in which the brand/product competes, in dollar amounts.

2. Direct contact between HQ and subsidiary managers

On average, how many days per year do marketing managers at your subsidiary spend at corporate headquarters?

3. Headquarters-Subsidiary Cooperation

(Cronbach 's [varies] = 0.82)

With regard to your subsidiary's brand or product management activities, please rate the extent to which you agree with the following statements using a 7-point scale where 1 = strongly disagree and 7 = strongly agree.

a. There is open communication between the marketing operations at headquarters and your subsidiary.

b. The marketing operations at headquarters and your subsidiary have similar goals.

c. Overall, your subsidiary's marketing operation is satisfied with its interaction with the marketing operation at headquarters.

d. There is a give-and-take relationship between the marketing operations at headquarters and your subsidiary.

4. Balance in Standardization-Adaptation

Think about the brand/product you indicated on page 1. Please approximate the extent to which headquarters has developed standardized product design processes that it requires you to use in your market versus allowing your subsidiary's marketing operation to develop and implement market- or country-specific product design processes. (Check "N/A" if an item does not apply.) Scale: 1 = 100% standardized by HQ marketing operation, 2 = 75% standardized/25% customized, 3 = 50% standardized/50% customized, 4 = 25% standardized/75% customized, 5 = 100% customized by subsidiary marketing operation.

5. Subsidiary size

For the most recent annual fiscal accounting period, please indicate the approximate number of subsidiary employees.

6. Technological Turbulence

(Cronbach's [varies] = 0.86)

Please rate your level of agreement with each of the following statements regarding your local market.

a. The technology behind the development of our products changes rapidly.

b. Technological changes provide big opportunities in our industry.

c. It is very difficult to forecast where the technology in our industry will be in the next 2 to 3 years.

d. A large number of new product ideas have been made possible through technological breakthroughs in our industry.

e. Technological developments in our industry are rather minor.

7. Competitive Intensity

(Cronbach's [varies] = 0.67)

Now, please rate your level of agreement with each of the following statements regarding competition for the specific brand, you indicated above, in your particular local market

a. Competition is cut throat.

b. Anything that one competitor can offer, others can match readily

c. Price competition is increasing.

d. One often hears of a new competitive move.

e. Our competitors are relatively weak.

8. Horizontal Interdependence

(Cronbach's [varies] = 0.82)

Please indicate the extent to which each of the following statements describes the marketing operation at your subsidiary and its relationship with marketing operations at other foreign subsidiaries.

a. The marketing activities of your subsidiary influence the outcomes of the marketing operations at other foreign subsidiaries.

b. Your marketing operation relies on the effective functioning of the marketing operations at other foreign subsidiaries.

c. Know-how gained in marketing operations at other foreign subsidiaries is transferred to your marketing operation.

d. The marketing activities at other foreign subsidiaries influence your subsidiary's marketing outcomes.

e. Marketing operations of other foreign subsidiaries rely on the marketing operation at your subsidiary to effectively perform their tasks.

f. Work in the marketing operation at your subsidiary is coordinated with the work of marketing operations at other foreign subsidiaries.

g. Know-how gained in the marketing operation at your subsidiary is transferred to marketing operations at other foreign subsidiaries.

h. Marketing activities at your subsidiary are jointly managed with the marketing operations at other foreign subsidiaries.

9. Informant Experience

How long have you been employed by this subsidiary?
Table 1. Discriminant Validity Analyses for Multiple-Item Scales

 HQ-subsidiary Technological
 cooperation Turbulence

HQ-subsidiary --
Cooperation

Technological -0.01 --
Turbulence 354.89
 94.14

Competitive -0.01 0.12
Intensity 93.71 88.65
 42.39 58.82

Horizontal 0.28 0.04
Interdependence 169.87 273.99
 152.26 183.82

 Competitive Horizontal
 Intensity Interdependence

HQ-subsidiary
Cooperation

Technological
Turbulence

Competitive --
Intensity

Horizontal -0.04 --
Interdependence 92.10
 171.46

Entries below the diagonal show (1) [phi], (2) difference
in chi-square from fixed ([phi] = 1.00) model, and free
([phi] estimated) model, and (3) chi-square for free model.

Table 2. Variable Means, Standard Deviations and Correlations

Variable 1 2 3 4

 1. Direct contact 1
 between HQ-subsidiary
 managers
 2. Balance in 0.23 * 1
 standardization
 --adaptation
 3. HQ-subsidiary 0.17 * 0.11 1
 cooperation
 4. Product success -0.03 -0.03 0.01 1
 5. Subsidiary size 0.04 -0.00 0.03 -0.05
 6. Informant 0.16 0.11 -0.06 -0.17
 experience
 7. Economic -0.09 -0.16 -0.07 0.03
 distance
 8. Technological 0.03 -0.05 0.03 -0.10
 turbulence
 9. Competitive -0.11 -0.16 0.01 -0.33 **
 intensity
10. Horizontal 0.01 0.10 0.18 * -0.11
 interdependence

Mean: 9.48 1.55 4.70 25.38
Standard Deviation: 11.01 0.64 1.24 23.09

Variable 5 6 7 8

 1. Direct contact
 between HQ-subsidiary
 managers
 2. Balance in
 standardization
 --adaptation
 3. HQ-subsidiary
 cooperation
 4. Product success
 5. Subsidiary size 1
 6. Informant 0.05 1
 experience
 7. Economic 0.11 0.18 * 1
 distance
 8. Technological 0.21 * 0.15 0.24 ** 1
 turbulence
 9. Competitive 0.18 * -0.01 0.15 0.10
 intensity
10. Horizontal 0.12 0.20 * -0.01 0.06
 interdependence

Mean: 1082.25 0.40 11879.33 4.68
Standard Deviation: 3510.32 0.37 8103.24 1.57

Variable 9 10

 1. Direct contact
 between HQ-subsidiary
 managers
 2. Balance in
 standardization
 --adaptation
 3. HQ-subsidiary
 cooperation
 4. Product success
 5. Subsidiary size
 6. Informant
 experience
 7. Economic
 distance
 8. Technological
 turbulence
 9. Competitive 1
 intensity
10. Horizontal -0.06 1
 interdependence

Mean: 5.68 3.71
Standard Deviation: 0.96 1.32

Table 3. Results of Hypotheses Tests

Independent Variables Model 1 Model 2

Control Variables

Subsidiary size 0.206 0.208
 (2.421 *) (2.426 **)

Technological turbulence -0.143 -0.146
 (-1.604) (-1.616)

Competitive intensity -0.332 -0.335
 (-3.945 ***) (-3.931 **)

Economic distance 0.181 0.173
 (2.035 *) (1.894)

Industry dummy variable 1 0.006 -0.006
 (0.069) (-0.059)

Industry dummy variable 2 0.075 -0.069
 (0.885) (0.804)

Horizontal interdependence -0.140 -0.136
 (-1.633) (-1.570)

Informant experience -0.160 -0.153
 (-1.788) (-1.675)

Main Effects

Direct contact between HQ 0.005
and Subsidiary Managers (0.002)

Balance in standardization- -0.050
adaptation (-0.570)

Joint Effects

Direct contact between HQ
and Subsidiary Managers X

Balance in standardization-
adaptation

Adjusted [R.sup.2] 0.141 0.129

F-statistic 3.627 ** 2.894 **

 Model 4 Model 5
Independent Variables Model 3 Low coop. High coop.

 [H.sub.1] [H.sub.2]

Control Variables

Subsidiary size 0.163 0.87 0.181
 (1.903) (2.304 *) (1.741)

Technological turbulence -0.144 0.091 -0.167
 (-1.599) (0.496) (-1.533)

Competitive intensity -0.335 0.032 -0.454
 (-3.963 **) (0.199) (-4.320 ***)

Economic distance 0.184 0.202 0.201
 (2.029 *) (1.119) (1.841 *)

Industry dummy variable 1 -0.016 0.016 -.023
 (-0.167) (0.095) (-0.192)

Industry dummy variable 2 0.072 -0.097 0.085
 (0.841) (-0.589) (0.833)

Horizontal interdependence -0.136 -0.373 -0.145
 (-1.566) (-2.221 *) (-1.352)

Informant experience -0.153 -0.608 -0.028
 (-1.690) (-2.515 *) (-0.236 *)

Main Effects

Direct contact between HQ -0.396 -0.151 -0.507
and Subsidiary Managers (-1.776) (-0.136) (-1.875 (+))

Balance in standardization- -0.188 -0.289 -0.164
adaptation (-1.173) (-1.197) (-1.118)

Joint Effects

Direct contact between HQ 0.476 0.209 0.549
and Subsidiary Managers X (1.96 *) (0.406) (1.832 *)

Balance in standardization-
adaptation

Adjusted [R.sup.2] 0.151 0.232 0.167

F-statistic 3.061 *** 1.907 2.509 ***

(+) p < 0.10, * p < 0.05, ** p < 0.10, *** p < 0.001


Endnotes

(1) The Authors, 2002, We wish to thank Satish Jayachandran, Luis Martins, Sharon Watson, and Sandra Waddock for their helpful suggestions.

(2) Indeed, the degree of standardization-adaptation balance achieved in an international product design is fundamental to examining the effectiveness of balancing standardization-adaptation, as such a balance is an intrinsic and obvious objective. Largely standardized products with no adaptation, or purely adaptive products totally unique to a single country market with no elements of standardization, are apparent reflections that the process is not achieving its fundamental objective.

(3) Many studies have provided examples of such adversarial roles and perspectives among headquarters and subsidiary managers stemming from differing organizational objectives and goals (e.g., Bartlett/Ghoshal 1989, Levitt, 1983, Prahalad/Doz 1987). This does not rule out exceptions of some MNCs having "enlightened" headquarters staff mindful of adaptation, or expatriate subsidiary managers reflective of the need for standardization. We discuss this point to highlight that the standardization-adaptation process is typically contentious, thus making headquarters-subsidiary co-operation important for sharing cross-border inputs and creatively resolving the standardization-adaptation conundrum.

(4) Note that, because the range of this variable was large, we took the natural log of the responses before including the variable in our analyses.

(5) Cronbach Alpha for this measure was 0.67.

(6) Our approach to use sub-group analysis is based on the view that headquarters-subsidiary cooperation, being a contextual variable facilitating the sharing of cross-border inputs, is a moderator that influences the "strength" of the relationship being tested (Venkatraman 1989). Such moderation effects should be ideally tested using sub-group analysis (Arnold 1982, Prescott 1986).

(7) We repeated this procedure using a 1/3 split and a median split and found results consistent with those reported here.

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Mohan Subramaniam, Assistant Professor of Strategic Management and Global Strategy, Operations, Information and Strategic Management Department, The Wallace E. Carroll School of Management, Boston College, Chestnut Hill, MA, USA.

Kelly Hewett, Assistant Professor of Marketing, Marketing Department, Moore School of Business, University of South Carolina, Columbia, SC, USA.

Manuscript received July 2002, January 2003.
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