Discussion regarding the Hypothesis

國

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

V. Discussion and Conclusion

1. Discussion regarding the Hypothesis

Company can create value with innovation, and the performance of innovation in real enterprises are shown as cost down and/or value increase of product. Increased value can be divided into producer surplus and consumer surplus, and their share is determined by price.

For a new product, following types of innovation can be applied: product innovation, process innovation, marketing innovation, and organizational innovation. Yet, innovation that resulted from product imitation can also lead to the development of a new product. As for the examples of specific application of imitation, clone, marginal imitation, incremental imitation, creative imitation can be used.

The types of innovation used for analysis were product innovation, process innovation, product imitation, and service related innovation such as marketing innovation and organizational innovation were excluded. Impact of innovation in a company could be recognized into cost down only, cost down and value increase, and value increase only, and it is hypothesized that value increase in this context is shown as value up.

Individual companies carry out a social contribution in various forms, but the ultimate goal of an enterprise is the maximization of profit. The maximization of profit is basically determined by sales rate and costs. Among the factors, price is the factor that companies can set directly.

Pricing strategies vary considerably across industries, countries and customers. Nevertheless, it generally concurs that pricing strategies can be categorized into cost-based pricing, competition-based pricing, and value-based pricing.

It is the purpose of this thesis to examine which pricing strategies are adopted according to type of innovation and impact of innovation when Korean SMEs develop products through innovation.

It is desirable to analyze the results of the analysis and compare it with the case studies in Korea and other countries similar to those of the subject, in order to obtain academic usefulness and practical usefulness. Unfortunately, it is not easy to find concrete research examples on the relationship between innovation and pricing strategies in Korea as well as in other countries.

Therefore, Discussion mainly includes hypothesis proposed in Hypothesis Development in 'III.

Research Methodology and Research Findings in 1.3 Synthesis of Research Findings 'IV.

Research Findings'.

‧

As can be shown from the research findings, following sample are support and partially support into H1-1 and H1-2 (Table IV-4).

C-2 (educational software), D-1 (precision machine part), E-3 (metal processing product), and I-2 (office furniture) falls into oligopoly market (Table IV-4). The four products increased value mainly through product innovation and chose 5 points ‘always’ for value-based pricing choice for price decision strategy.

Specifically, C-2, D-1, and E-3 are support 1 These three products precisely satisfy the H1-1. In detail, all three products responded to value up by asking for innovation objectives. For the other product, I-2 were answered as value up and cost down when asked about the objective of the innovation unlike the above products. If the objective of the innovation is both the value up and cost down, it is also likely to apply value-based pricing.

H1-1 is supported by products C-2, D-1 and E-3, and H1-2 is partially supported by I-2 product.

As can be shown from the research findings, only the product G-1 partially support into H1-1 (Table IV-3).

G-1 is a confectionery and bakery product for special customers (dermatologically ill patients), and the product developed by Product Innovation achieved both cost down and value up.

However, the value up effect is greater than the cost down, and the responses to the questions related to the recent pricing strategy of G are as follows. Responses were 3 point ‘sometimes’

for the applicability of Cost-based pricing, 2 points ‘rarely’ for the applicability of value-based pricing, and 5 points ‘always’ for the applicability of competition-based pricing. Such results indicate that the price decision strategy of Company G is mainly competition-based pricing, which does not follow H1 because entry barrier was very low, and the products were easily imitated. If this product was patented, the pricing strategy would have changed. In the case of this company, it was said that it did not attempt to acquire a patent because it felt inconvenience in the cost of patent application and administrative procedure in early stages.

However, there is a great limitation to generalize the analysis result due to the limitations such as small number of samples, industrial diversity of companies.

Hypothesis 2 are hypothesis about pricing strategy when the objectives by product imitation is value up and cost down.

Among the interviewed products, all samples belong to the monopolistic competition market.

The results of the research findings show that A-1 (game software), B-1 (bakery), C-1 (educational software), E-1 (metal product), F-1 (traditional food), I-1 (kitchen furniture), J-1 (noodle), and K-1 (pet snack) (Table IV-3).

As can be expected, objectives of innovation by product imitation is mainly cost down, and it can be confirmed in the analysis result.

‧

First, let's look at a product that says that the objective of innovation is cost down only. This product is C-1, E-1, I-1, J-1, and K-1, respectively. All of these products were cost-based pricing except for I-1.

The question of whether to apply cost-based pricing to product pricing strategy was answered as ‘very often’ instead of ‘always’. The remaining E-1, J-1, and K-1 products answered

‘always’. In response whether adopt competition-based pricing, C-1 responded ‘Rarely’ and E-1, J-E-1, and K-1 answered ‘Never’.

I-1 responded ‘very often’ to questions about whether to apply competition-based pricing and

‘sometimes’ to questions related to cost-based pricing

There are A-1 and F-1 samples that answered that the objective of innovation is both value up and cost down. All of these products answered ‘very often’ when asked whether they applied competition-based pricing and ‘sometimes’ for cost-based pricing.

The results that can be derived from the above result are as follows.

H2-1 is partially supported by products A-1 and F-1, and H2-2 is fully supported by products C-1, E-1, J-1 and K-1.

However, I-1 and B-1 products are not suitable for the hypothesis, and the reason is as follows.

I-1 is a kitchen cabinet made by company I. The company's location is a difficult environment for the company to move into and out of traffic. Therefore, the distance between competitors is very far compared to other regions. Company I would not involve the low-price competitions with its competitors, therefore company I didn’t choose cost-based pricing. However, customer still could go to another region to buy the alternative product. And company I has no guarantee a certain level of market share during its stay in the region. From these characteristics, the company set a price for product I-1 by following the price of the competitor operating at the closest distance. It was a selection of competition-based pricing.

B-1 is a pizza made by pizza shop located in the university. Company B is selling a product that is very similar to other pizza shop but slightly different. Company B applied product imitation to achieve price reduction and value up. The question asked about the pricing policy was answered as follows. Responses were 1 point ‘Never’ for the applicability of Cost-based pricing, 5 points ‘Always’ for the applicability of value-based pricing, and 1 point ‘Never’ for the applicability of competition-based pricing. Such results indicate that the price decision strategy of Company B is mainly value-based pricing, which does not follow H2 because there is no other restaurant in the school cafeteria where Company B is located. That means there is no competition because there are no restaurants other than company B. That is why Company B was able to apply value-based pricing.

The last Hypothesis 3 is the following hypothesis on the pricing strategy when the impact of process innovation is cost down.

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

Among the products surveyed, all of them belong to the monopolistic competition market.

Research findings indicates that E-2 (metal product) and F-2 (healthy food) belong to this market. Both E-2 and F-2 indicated ‘always’ for choosing cost-based pricing in terms of price determination under only cost down objective. Thus, it can be concluded that H3-1 is not examined (no suitable sample) and H3-2 is fully supported by the studied cases.

However, as mentioned earlier, considering the limitations of the number of samples and the wide range of industry itself, there is a great limitation to the validity of the hypothesis.

‧

Korean SMEs have taken a crucial role in economic growth after the early stages of economic development in 1960s. After early 1970s, Korean SMEs have steadily grown as subcontractors of large enterprises due to their relatively low wages, interrelationship with large companies and market protection. Since the early 1980s, the Korean government has fully enacted policies to support SMEs. SME sector has been growing and developing greatly followed by various government support policies, and it accounts for 90.2% of overall employment and 50.9% of added value in Korean industry. In order for SMEs to continue developing, it is essential to obtain a continuous profit from the company, and pricing strategy is very important in this regard. On the other hand, profitable pricing requires continuous innovation by the company.

Based on this reality, this thesis examines the relationship between market structure, innovation, and pricing theory, and examines what kind of pricing theory Korean SMEs should pursue through in - depth questionnaires. The pricing strategy of an enterprise can vary depending on the type of market structure. In the case of monopoly, the firm determines the price by profit maximization principle, and since there is no room for the individual firm to determine the price in the perfectly competitive market, so the cases of Korean SMEs were investigated on how the firm determines the price according to the type of innovation in oligopolistic competition.

As the studied case will understand, the major type of innovation South Korea's SMEs choose to innovate is product imitation. (Table IV-2) This is due to the financial and technical uncertainties inherent in SMEs. SMEs do not have the financial support and time in the development of new technologies and are not capable of avoiding the crisis that they will not be able to reach innovation after the development of those technologies. Therefore, SMEs choose product imitation that is easy to buy and easy to adopt.

In price determination theory, cost-based pricing, competition-based pricing, value-based pricing, etc. are often used for a company’s price determining strategy. Also, the types of innovation include product innovation, process innovation, marketing innovation, and organizational innovation, but innovation through product imitation was used for analysis, excluding marketing innovation, and organizational innovation, which are mainly related to services. Companies can create value through innovation, and the performance of innovation in real companies is shown as cost down and/or value increase of product. Increased value can be divided into producer surplus and consumer surplus, and its share is determined by price.

In order to verify the hypotheses, surveys were conducted on 15 sample products from 10 SMEs in major cities such as Seoul, Busan, and Daejeon. Surveys constituted of 11 major questions about Korean SMEs’ the price determining method depending on product innovation, product imitation, process innovation and their impact.

The result of the survey was as follows.

The first hypothesis is all four selected products improved value primarily through product