韓國中小型企業的創新與定價 - 政大學術集成

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(1)國立政治大學科技管理與智慧財產研究所碩士學位論文. 韓國中小型企業的創新與定價 Innovation and Pricing Strategies 治 Small and Medium. 政. 大. 立Enterprises in Korea. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 指導教授：許牧彥博士研究生：姜權一撰. 中華民國一零七年十一月 DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(2) Innovation and Pricing Strategies for Small and Medium Enterprises in Korea Abstract Korean small and medium enterprises (SMEs) have taken an essential role in economic growth of Korea. 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.. 政治大. According to the survey, in the case of the oligopoly market, all samples were improved product value primarily through product innovation and selected Value-based Pricing.. 立. ‧. ‧ 國. 學. In case of monopolistic competition, samples which achieved cost down with the new product through the product imitation uses the Cost-based Pricing and the Competition-based Pricing according to the degree of product differentiation. And samples which achieved the cost down in the product development through the process innovation use the Cost-based Pricing for their pricing strategy.. y. Nat. sit. n. al. er. io. In addition to this thesis, further research is required to understand the relationship between future innovation and pricing strategy.. i n U. v. Keywords innovation, pricing strategies, objective of innovation, value capturing. Ch. engchi. I. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(3) Abbreviations. Abbreviations Abbreviation. Full Term. CoD VuP HBR ICT IT KOSBIR KRW NTIS OECD R&D SBC SBIR SMEs US USD. Cost Down Value Up Harvard Business Review Information and Communication Technology Information and Technology Korea Small Business Innovation Research South Korean Won National Science and Technology Knowledge Information Service Organisation for Economic Cooperation and Development Research and Development Small & Medium Business Cooperation Small Business Innovation Research Small and Medium Enterprises United States United States Dollar. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. II. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(4) Innovation and Pricing for Small and Medium Enterprises in Korea. Table of Contents Abstract ...................................................................................................................................... I Abbreviations ............................................................................................................................ II Table of Contents ........................................................................................................................ i List of Tables ............................................................................................................................ iii List of Figures ........................................................................................................................... iv I. Introduction ............................................................................................................................ 1 1. Background ..................................................................................................................... 1 1.1 Roles of SMEs in Korea ......................................................................................... 1 1.2 Korean Government Innovation Policy for SMEs ................................................. 3 2. Subject and Composition of the Thesis ........................................................................... 6 3. Research Questions ......................................................................................................... 7 II. Literature Review .................................................................................................................. 8. 立. 政治大. ‧. ‧ 國. 學. 1. Pricing Strategies of a Firm ............................................................................................. 8 1.1 Cost-based Pricing ................................................................................................ 11 1.2 Value-based Pricing .............................................................................................. 13 1.3 Competition-based pricing ................................................................................... 14 2. Innovation and Pricing .................................................................................................. 15 2.1 Pricing and the Value Capturing of Innovation .................................................... 15 2.2 Pricing Strategy for Innovation ............................................................................ 19 3. Nature of Innovation ..................................................................................................... 20 3.1 Basic Definition of Innovation ............................................................................. 20 3.2 Stages of the Innovation Process .......................................................................... 22 3.3 Types of Innovation .............................................................................................. 24 3.4 Distinguishing between Product Innovations and Process Innovations ............... 28 3.5 objectives of Innovation ....................................................................................... 29 III. Research Methodology ...................................................................................................... 30. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 1. Hypothesis Development .............................................................................................. 31 2. Research Design ............................................................................................................ 33 3. Questionnaire for Survey .............................................................................................. 35 4. Data Collection .............................................................................................................. 36 4.1 General Method of Data Collection...................................................................... 36 4.2 Detailed Method of Data Collection ..................................................................... 37 IV. Research Findings .............................................................................................................. 39 1. Interview Data Analysis ................................................................................................ 39 1.1 Research Population Background Information..................................................... 39 1.2 Research Results ................................................................................................... 40 1.3 Synthesis of Research Findings ............................................................................ 49 -i-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(5) Table of Contents. V. Discussion and Conclusion.................................................................................................. 52 1. Discussion regarding the Hypothesis ............................................................................ 52 1.1 Results .................................................................................................................. 53 2. Conclusion..................................................................................................................... 56 3. Research Limitation ...................................................................................................... 58 Reference ................................................................................................................................. 59 Appendix .................................................................................................................................. 62 Questionnaire Part A and Part B........................................................................................ 62 Part A ....................................................................................................................................... 62 Part B ....................................................................................................................................... 63. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -ii-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(6) Innovation and Pricing for Small and Medium Enterprises in Korea. List of Tables Table I-1. Basic Statistics of SMEs in Korea ............................................................................. 1 Table I-2. Comparison total R&D investment among the nations ............................................. 4 Table II-1. Major Characteristics of Pricing Strategies ............................................................. 9 Table IV-1. Background Information of Interviewees ............................................................. 39 Table IV-2. Survey results: Market Structure, Innovation and Pricing Strategy ..................... 49 Table IV-3. Research Findings for Monopolistic Competition ................................................ 50 Table IV-4. Research Findings for Oligopoly .......................................................................... 50. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -iii-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(7) List of Figures. List of Figures Figure II-1. Value Creation Depends on Benefit and Cost Positions ....................................... 15 Figure II-2. Value Created between Producers and Consumers .............................................. 16 Figure II-3. Modified Value Created between Producers and Consumers ............................... 17 Figure II- 4. Stages of the Innovation Process ......................................................................... 22 Figure III-1. Hypothesized Relationships Among Research Variables .................................... 30. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -iv-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(8) Innovation and Pricing for Small and Medium Enterprises in Korea. I. Introduction 1. Background 1.1 Roles of SMEs in Korea The relative importance of small and medium enterprises (SMEs) is high in South Korea (henceforth Korea) like in other Asian countries. As of the end of 2015, about 3.6 million SMEs were in businesses, employing 14.6 million people in Korea. Since large companies employ about 2.1million workers, SMEs sector contributes to 87.2% of the national workforce. Table I-1. Basic Statistics of SMEs in Korea. Number of Workers (in thousand). 1973. 1980. 1990. 2000. 2010. 2015. 237. 1,037. 1,044. 1,193. 1,376. 2,173. 3,891. 18,073. 22,256. 29,779. 67,679. 353,560. 3,123,284. 3,600,882. 135. 701. 1,015. 1,156. 690. 1,873. 1,647. 457. 1,000. 1,864. 1,963. 12,263. 15,127. 47.2. 72.8. 64.8. 55.7. 49.8. 49.3. 49.1. 52.8. 27.2. 35.2. 44.3. 50.2. 50.7. 50.9. 267. 立. 政治大. 學. Value Added (percentage). 1963. ‧ 國. Number of Establishments. Large Firms* SMEs Large Firms SMEs Large Firms SMEs. ‧. Source: Korea Federation of SMEs, DB (http://www.kbiz.or.kr/home/homeIndex.do?menuCode=stat). Note: 1963~2000 (Number of works of SME – over 5 persons), 2010~2015 (Number of works of SME – over 1 person) *Large firms: Number of works - over 300 persons.. n. al. er. io. sit. y. Nat. The relative roles of SMEs in Korea's economy have changed rapidly. The roles of SMEs have undergone at least two very clear stages; there was a stage where they declined sharply from early 1960s to 1976, and their roles gradually have increased (from 1976 to recently). However, the latter trend appeared to be delayed and reversed as Asia saw the 1997-99 currency and financial crisis and SME’s investment decline in the mid-1990s.1. Ch. engchi. i n U. v. Undoubtedly, SMEs took over the manufacturing sector of the economy in the early 1960s, but, by the mid-1970s, Korean government realized the limitation of the light industry driving policy. The government's policies to foster heavy chemical industry were developed in such a way to provide preferential treatment to large corporations. Korea has become famous for its extreme power in the economy and the public sector of large chaebol2 (conglomerate) firms. In fact, In Korea, where large corporations and chaebol are leading the economy, SMEs are in stark contrast to other East Asian economies such as Japan and Taiwan, which play a much more important role than large corporations.3 The rapid growth of Korean Chaebol is closely. 1. 2 3. Nugent, Jeffery B. and Seung-Jae Yhee (2001). Small and Medium Enterprises in Korea: Achievements, Constraints and Policy Issue: World Bank Institute. Chaebol is run a large industrial conglomerate, controlled by an owner or family that in South Korea. Scitovsky, Tibor (1986). “Economic Development in Taiwan and South Korea, 1965–1981.” In Lawrence J. Lau, ed., Models of Development: A Comparative Case Study of Economic Growth in South Korea and Taiwan. San Francisco, Calif.: ICS Press. -1-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(9) Section I. Introduction. related to the Korean government and economic development policies.4 After the middle of 1970s, SMEs have steadily grown into suppliers of Chaebol due to relatively low wages, interrelationships with large enterprises, and market protection.5. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 4 5. Ch. engchi. i n U. v. Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit. ibid. -2-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(10) Innovation and Pricing for Small and Medium Enterprises in Korea. 1.2 Korean Government Innovation Policy for SMEs Since the early 1980s, Korean government has fully enacted policies to support SMEs. However, there is little evidence as to whether these policies had a major impact, and if so, there is little evidence of whether these policies have been socially cost effective. The revival of SMEs also had influence on employment and export of manufacturing industries. If small business support policies were effective, income disparity trends are related, and lowering inequality is certainly one social benefit of such policies.6 Promotional measures for SMEs explain the majority of the legal and institutional characteristics of SME growth.7 There were quite fragmentary and highly selective monetary and financial incentives. However, the overall industry incentive system was not very effective in promoting growth for small businesses because it supported large companies. In the 1980s, while implementing a focused and comprehensive policy to promote small and medium-sized businesses, the government began to establish an industry-specific incentive system to turn it into a functional and effective policy support.8 In April 1982, a ten-year long-term plan for promoting SMEs up to 1991 was formulated. Small business-related laws such as SME Basic Law and Small Business Promotion Law were revised. Several new promotional measures were taken. It is worth noting that industrial policies focusing on technology and human resource development are extremely useful for the development of SMEs, as the direction of the new policy greatly promotes the innovativeness of SMEs. It also greatly helped growth of small businesses by promoting foreign capital inflows and technology permits through trade liberalization policies. 9 The industrial policy of the 1990s was to strengthen industrial competitiveness as the Korean economy rapidly liberalized and integrated into the global economy. After the financial crisis in 1997, the development policy of SMEs promoting technology development was further strengthened as Korean economy became unable to rely on large companies. The Venture Business Promotion Act was enacted in 1997 to promote venture businesses, especially high-tech industries. 10 The government also implemented policies such as information technology (IT) education, information management system promotion, and digitalization support for production lines to enhance IT utilization of SMEs.11. 立. 政治大. ‧. ‧ 國. 學. er. io. sit. y. Nat. al. n. v i n C hmajor producers U Nowadays, SMEs are considered to be ideas, innovations and corporate e n g c hofinewof employment technologies, and are recognized as a major source and as an economic. hub. SME policy in Korea also particularly emphasizes innovation, globalization, and balanced development with large companies12. Thus, the Korean government strongly emphasizes the policies of the SMEs that can lead to innovation, globalization and balanced development with large companies.13. Nugent, Jeffrey B., and Seung-Jae Yhee. (2002). “Small and Medium Enterprises in Korea: Achievements, Constraints and Policy Issues”: Small Firm Dynamism in East Asia, pp. 85–119. 7 Xueyi, Zhu and Fang Cunhao, (2010). “Evolution of SME Policy in Japan and Korea: Experience and Policy Implications.” 8 ibid. 9 ibid. 10 ibid. 11 ibid. 12 ibid. 13 ibid. 6. -3-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(11) Section I. Introduction. Based on the Small Business Innovation Research (SBIR), Korean government settled the Korea Small Business Innovation Research (KOSBIR) program in 1998 and has steadily increased the budget. Indeed, the expenditure for SME-operated government research and development (R&D) projects recorded 2,897 billion won in 201614, which is equivalent to 15.2% of the government’s total R&D investment and similar to that of the US SBIR’s total support. According to the National Science and Technology Knowledge Information Service (NTIS) database, which integrates the management of all government R&D projects, among the 30,448 R&D projects awarded to firms in 2010-2014, the median fund amount was 200 million South Korean Won (KRW) while the top 20% marked KRW 525 million to 54.7 billion and the bottom 20% was less than KRW 100 million. In the US, the number of Phase Ⅰ projects, which is the proof-of-concept stage, and a total from USD 0.1 million to USD 0.15 million is provided for 6-9 months, (about USD 0.10 million per project) outnumbered Phase Ⅱ projects, which supports the subsequent full-scale R&D with funds reaching $1 million for a period of 24 months, by two to even three times. But, in Korea, about 80% of projects were funded with over KRW 100 million per project―this implies that there is a strong tendency to omit the initial proof-of-concept stage and begin with full-fledged support. Such bold and aggressive investments in SMEs R&D are also high in the international community. Table I-2. Comparison total R&D investment among the nations Japan (2013). Germany (2013). France (2013). 6,033 (914). 21,842 (2,066). 1,135 (49). 2,448 (544). 4,292 (492). 5,955 (662). 21,996 (1,515). 4,620 (99). 43,838 (3,581). 5,755 (148). al. n. Total. 11,988 (1,576). Ch. engchi. Unit: USD 1 million, PPP exchange rate Note: Figures in parentheses denote government-funded R&D costs. Source: Main Science and Technology Indicators (OECD stat webpage). y. sit. 4,230 (499). 4,881 (261). 6,678 (1,043). 9,173 (753). er. io. Medium. U.S. (2011). Nat. Small. Korea (2011). ‧. Size of SMEs. 學. ‧ 國. 立. 政治大. i n U. v. In 2016, KRW 3 trillion of the KRW 8.1 trillion was earmarked for the innovation of SMEs in the form of R&D grants, making Korea the second biggest spender next to the US among OECD members, ahead of Germany and Japan in absolute amount. However, despite these investments, Korean SMEs' technological innovation is inadequate compared to other countries. In response to this, South Korean SMEs are consistent with low price policy for prices in other markets 15 . At the end of April in 2015, Small & Medium Business Cooperation (SBC) conducted 'Survey on Korean Product Recognition by US. 14. 15. Ministry of Science and ICTㆍKorea Institute of Science & Technology Evaluation and Planning, 2017. 2016 National R&D Project Report and Analysis. Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit. -4-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(12) Innovation and Pricing for Small and Medium Enterprises in Korea. Consumers' targeting 1,000 consumers across the US. The percentage of respondents who answered "purchasing motive" for Korean products as "price" was 68.1%.16 Eventually, the Korean SMEs will use a strategic low-cost policy for entering new markets, but Chinese products already take control of the market, which can replace them. In other countries including the US market, Korean SMEs product is lower in awareness than China’s; even more so in Chinese market, all parts are found to be inferior to Chinese17. The most powerful weapon for SMEs is not the lowest price. It invites customers to view products and services as products and obscures the value added. In addition, SMEs that want to compete at lower prices can be eliminated at any time by large competitors with lower operating costs. It is not easy to overcome the difficulties faced by SMEs in Korea. The new acquisition of innovative technology by SMEs to overcome these risks is even more risky and longer. Public and private financing for SMEs can also be disrupted by market uncertainty and lack of adequate collateral.18 If this situation persists, the productivity gap between SMEs and large corporations can no longer be narrowed. Therefore, it will be much more difficult to hire skilled and talented workers in front of SMEs.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 16. 17. 18. Ch. engchi. i n U. v. Small and medium-sized companies, use the flexible price strategy when entering the US!, July 31 2015, from: http://news.joins.com/article/18358121 Foreign Consumer Recognition Result of Korean Products, Jan 22 2018, from: http://www.ieconomic.co.kr/news/articleView.html?idxno=7603 Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit. -5-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(13) Section I. Introduction. 2. Subject and Composition of the Thesis For survival and growth of a company, it is essential to make an appropriate amount of profit, and the magnitude of profit is closely related to the price level of the product. According to Harvard Business Review (HBR)19, a price war can be best avoided by utilizing smart pricing strategy. HBR also noted that small businesses with a solid pricing strategy can easily get out of the lower price war.20 The research objective of this thesis is to identify the pricing strategy of the SMEs for innovation in monopolistic competition and oligopoly market in Korea. Basic data was collected through questionnaires and interviews. The remainder of the thesis is organized as follows. Section II provides literature surveys related to market structure and pricing theory, pricing strategies of a firm, nature of innovation, and relation of innovation and pricing. Then, Section Ⅲ suggests research methodology including hypothesis development, research model, survey environment, and data collection. Detailed studies of survey result are listed in Section Ⅳ, and, finally, Section V will be concluding this thesis with implications for future research.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 19 20. Ch. engchi. i n U. v. Rao, A.R., M.E. Bergen, & S. Davis (2000), “How to Fight a Price War,” Harvard Business Review. ibid. -6-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(14) Innovation and Pricing for Small and Medium Enterprises in Korea. 3. Research Questions This thesis attempts to answer and inform the literature as to the following research questions: 1. What is the major type of innovations initiated by SME of Korea? 2. What are the relationships between innovation types and pricing strategies in SMEs of Korea? 3. What are the impacts of objectives of innovation upon the relationships between innovation types and pricing strategies in SMEs of Korea? The research questions are chosen to establish a deep and wide understating of how innovation determine pricing issue in relations to of a definite purpose in an area lacking empirical and theoretical research.. 政治大. This research focus on the characteristics of SMEs’ innovation first. especially, this research wants to focus on what kinds of innovations come from SMEs that lack financial and technical skills compared to large businesses. It also concentrates more on what price policies appear to be associated with innovation in SMEs. Depending on the objectives and type of innovation that occurs, the company seeks to determine whether it chooses pricing strategies through internal decisions or whether external factors determine pricing policies, regardless of internal decisions. Finally, if the market structure and pricing policy are strongly related to each other as the previous literature surveys reveal, market structure will play a role in the relationship between innovation and pricing decisions.. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -7-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(15) Section II. Literature Review. II. Literature Review This chapter discusses the conceptual foundation of the research: relationships between different market structures pricing strategies in theory, pricing strategies of individual firms in practice, elements of innovation, and relationships between price and innovation.. 1. Pricing Strategies of a Firm According to Blackburn, price strategy is an important strategic issue that changes based on the market structure of the company. Obviously, pricing and market structure, depending on their market structure companies determine the prices of products and services. What greatly affects profitability is price. The pricing strategy varies considerably depending on industry, country and customer. Nevertheless, price strategies can generally be divided into three groups21:. 政治大. 立. . Competition-based Pricing, and. . Value-based Pricing.. ‧ 國. Cost-based Pricing,. 學. . ‧. A summary of the key features of these different approaches is the Table 3. As mentioned in the table, each strategy has strength and weakness. The advantages of the first two methods are that they are not sufficiently focused on customer needs and requirements, but data can be easily used. 22 Conversely, a value-based approach that is considered from a customer's perspective has difficulties compared to other methods in obtaining and interpreting relevant data.23. n. er. io. sit. y. Nat. al. 21. 22 23. Ch. engchi. i n U. v. Hinterhuber, Andreas. (2008), “Customer Value‐Based Pricing Strategies: Why Companies Resist.” Journal of Business Strategy, vol. 29, pp. 41–50. ibid. ibid. -8-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(16) Innovation and Pricing for Small and Medium Enterprises in Korea. Table II-1. Major Characteristics of Pricing Strategies Item. Cost-based Pricing. Competition-based Pricing. Value-based Pricing. Definition. ▪ Determine pricing based on cost accounting data is Cost-based pricing. ▪ Use anticipated or observed price levels of competitors as primary source for setting is Competition-based pricing. ▪ Apply the value a product or service delivered to a predefined segment of customers as the main factor to setting prices is Value-based pricing. Examples. ▪ Cost-plus pricing ▪ Mark-up pricing ▪ Target-return pricing. ▪ Parallel pricing, umbrella pricing, penetration/skim pricing ▪ Pricing according to average market prices. ▪ Perceived value pricing ▪ Performance pricing. Main Strength. ▪ Data readily available. ▪ Data readily available. ▪ Consider the customer’s perspective. Main Weaknesses. ▪ Not considering competition ▪ Does not consider customer’s willingness to pay. ▪ Does not consider customer’s willingness to pay. ▪ Not easy to obtain related data and interpret ▪ Long-term profitability is considered, so it can be priced relatively high. ▪ Customer value was not given in the first place but needs communication for value.. 政治大. ▪ Need to come up with an. alternative plan to price the product. (if – and only if –. products/services in question cannot be differentiated). ‧ 國. ▪ Weakest approach. 立. ▪ Direct connection to customer needs is the best approach. 學. Overall Evaluation. Source: John S. Blackburn, (2012), Market Structure Differences and Pricing Strategies, Managerial Economics.. ‧. sit. y. Nat. As pricing textbooks make clear, Realistically, pricing is the most difficult and challenging task in the business.24 That's why the more capable companies they are, the better the way they handle the complexity of pricing policies.25. n. al. er. io. To simplify the complexity of pricing, companies use only the information they need, without analyzing all the available information.26. Ch. i n U. v. In other words, pricing refers to a series of activities carried out by the company's organizational managers. 27 In the process, pricing information is collected and shared and interpreted among the organizational processes. The pricing strategy in the market is hidden from the boundaries of the organization, but it also appears as price changes, price bundles, and price levels within the product line, etc.28. engchi. As mentioned in the above table, the three most commonly used strategies in pricing are as follows.. 24 25. 26 27. 28. Monroe, Kent B., (1990). Pricing: Making Profitable Decisions. New York: McGraw Hill. Dutta, Shantanu, Mark Zbaracki, and Mark Bergen, (2001). “Pricing Process as a Capability: A Case Study,” Marketing Science Institute Working Paper, No. 01-117. Cambridge, MA: Marketing Science Institute. Hague, D.C., (1971). Pricing in Business. London: George Allen & Unwin Ltd. Noble, Peter M. and Thomas S. Gruca, (1999). “Industrial Pricing: Theory and Managerial Practice,” Marketing Science, 18 (3), 435-54. ibid. -9-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(17) Section II. Literature Review. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -10-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(18) Innovation and Pricing for Small and Medium Enterprises in Korea. 1.1 Cost-based Pricing This approach, characterized by financial attention, is the most common and most frequently used way to determine the price of a product.29 Basically, pricing is required to fully and fairly allocated all the costs of product production. It's a simple guide to profitability in theory, but it's actually designed in anticipation of average financial performance. Because the costs for production have been fully exposed, the paradigm calculates prices based on the industrial production environment and the level of pricing is determined by the extent to which the producer considers appropriate.30 Today, however, it is impossible to determine the unit price of the product in advance before deciding the price because the unit price of the raw material is very flexible. Cost-based pricing therefore follows a different pricing approach for different markets, with higher pricing in narrower and weaker markets and lower pricing in powerful and diverse markets.31. 政治大. The price of a product is set at cost, and a fixed percentage is added to cost.32 The most basic reason for using a cost-based pricing policy is simplicity. The reason why it is not possible to accurately predict profit maximization points is because it is difficult to obtain information about marginal revenues and marginal costs. Cost-based pricing makes it simple to mark up and include company's desired return. Desirability from the standpoint of public relations is another advantage of cost-based pricing.33 This cost-based pricing approach also provides a good foundation for cost increases when they are needed.34. 立. ‧. ‧ 國. 學. er. io. sit. y. Nat. There are two steps involves Cost-based pricing typically. First, determine unit price or average total cost of product production. When the company determines unit production costs, it must first specify the level of production because the average total cost varies as the yield varies. 35 After the company sets the unit price, the entity raises the unit price. Mark-up is typically calculated as a percentage of the cost that a company cannot easily allocate to a particular product that it produces and the return on its investment.36. n. al. Ch. engchi. i n U. v. The cost-based pricing method is determined by the following equation:37 . Price = Average total cost per unit ⅹ (1 + mark-up). The focus on averages rather than marginal costs is considered one criticism of cost-based. 29. 30 31 32 33 34 35 36 37. Nagle, T.T., Hogan, J. E., & Zale, J., (2011). The Strategy and Tactics of Pricing – A guide to growing more progitable. New Jersey: Prentice Hall. ibid. ibid. Robert J. Graham, (2013). Managerial Economics for Dummies, Wiley. ibid. ibid. ibid. ibid. ibid. -11-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(19) Section II. Literature Review. pricing. In order to maximize profits, marginal cost information equivalent to marginal revenue information is needed. However, cost-based pricing is not the case and may not lead to profit maximization.38 The idea of ignoring demand conditions is another criticism of cost-based pricing.39 As a result of ignoring demand, the company sets a higher price than the market equilibrium price. As a result, the company is making surplus. The result is a situation where all products produced by the company are not sold to the market. Cost-based pricing doesn't work for a particular business, and here are two important reasons.40 . . Although demand for products has a direct effect on prices, cost-based pricing determines prices without considering customer demand. Customers in the market will gladly pay more to buy the product if they feel they are short of supply compared to demand. On the other hand, if the market demand is very low, customers will be looking for lower amounts through discounts.41. 治政 Price-based pricing is predicated on a market that does大 not compete. Companies admit the value of their products in立 the market through competition and set prices. However, this ‧. ‧ 國. 學. simple formula that adds a level or percentage of profit can be difficult to operate outside a very limited industry. Cost-based pricing also makes it easier for other competitors to set a low price with a simple formula.42. n. er. io. sit. y. Nat. al. 38 39 40 41 42. Ch. engchi. i n U. v. Robert J. Graham, (2013). Op. cit. ibid. Methods to Price Your Product, from: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex1133 ibid. ibid. -12-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(20) Innovation and Pricing for Small and Medium Enterprises in Korea. 1.2 Value-based Pricing The price of a particular product depends on the value that the customer feels about the product. Its value depends on hundreds of different reasons and situations. The essential purpose of the value-based pricing is to reduce the deficit and reflect the customer's willingness to pay for a particular product in the price. 43 The overall level of satisfaction a customer can gain by offering a product or service is called "value."44 This value is often referred to as "economic value". And The value-based pricing approach starts with an understanding of how customers value a product clusters. To avoid the general error that may be made in pricing, customers first need to understand the source of value.45 This pricing strategy, which seems easy to understand, is very difficult to calculate when compared to other pricing strategy, Cost-based and Competition-based, and requires a lot of follow-up research. The reason why this pricing method is not used much is because it is explained by psychological and intangible things that are difficult to convert into monetary values.46. 治政 The Following are disadvantages of value-based pricing . 大立  Disregard for production costs 47. Insufficient consideration of competition. ‧. ‧ 國. 學. . n. er. io. sit. y. Nat. al. 43. 44 45. 46 47. Ch. engchi. i n U. v. Sveinn Porarinsson. (2013), Deciding on the Price of a Product/Service in a Start-up Setting: Coping with diverse objectives, market dynamics and uncertainty, University of Gothenburg. Sveinn Porarinsson. (2013), Op. cit. Hinterhuber, A. (2003), Towards value-based pricing - An intergrative framework for desicion making. Industrial Marketing Management, 765-778 ibid. Methods to Price Your Product. (1999), Alberta Agriculture, Food and Rural Development: Agricultural Marketing Resource Center. -13-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(21) Section II. Literature Review. 1.3 Competition-based pricing Competition-based pricing is the second-most-popular pricing approach. Although owners may call this a strategic pricing, it is not particularly strategic. The pricing approach is to price the company's products at or very similar prices after checking the prices of competitors. 48 This pricing strategy, which has the advantage of being very simple, is a way to determine prices even without thorough market research. It also seems comparably secure. In other words, companies can lower their risk of losing market share by setting prices similar to their competitors.49 If market has strong competition, there are more products that customers can choose from. The customer's choice is probably the cheapest item or the provider that suggests the best customer service. However, consumers should pay attention to reasonable and normal prices in the market.. 政治大. The big advantage of competition-based pricing could be focusing on the industry in which the company is competing. The industry is closely watching existing and emerging competition types. Knowing the inside of a competitor can help the company's management decide how to manage the company.. 立. ‧ 國. 學. ‧. To understand competition, further research is needed. One needs to understand what the company is selling, the type of company competes with, the quantity and type of substitutes, and how the company works in its industry.. Nat. sit. y. Companies using a competitive pricing policy must consider the following disadvantages:50. . Not suitable growth strategy. . Competitors can easily mimic whatever price it selects. 49 50. n. 48. al. er. The practice of lowering prices of known competitors and applying them to products. io. . Ch. engchi. i n U. v. Jagmohan Raju, Z. John Zhang, (2010), Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Pearson Prentice Hall. ibid. Nagle, T. T., Holden, R. K, (2002), The Strategy and Tactics of Pricing, Upper Saddle River, NJ: Pearson Education Inc. -14-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(22) Innovation and Pricing for Small and Medium Enterprises in Korea. 2. Innovation and Pricing 2.1 Pricing and the Value Capturing of Innovation According to Tawfik and Albrecht, for an enterprise to be successful, it must not only be able to create value for a sustained period but must also be able to acquire value (value created) made in the form of economic profit (producer surplus)51. For creating value, the company must provide customers with higher use value than the costs incurred in providing the product. Thus, the value is created by the difference between the value of use (perceived use value) that the customer perceives for the product and the cost that the company has spent providing the product. Following figure shows the relationship between these two concepts.. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. al. n. v i n C U Figure II-1. Value Creation Depends onhBenefit and Cost Positions i e h n c g Source: Jelassi, Tawfik and Enders Albrecht. (2008), Strategies for e-Business, 2 edition: Pearson, nd. 51. Jelassi, Tawfik and Enders Albrecht (2008), Strategies for e-Business, 2nd edition: Pearson. -15-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(23) Section II. Literature Review. 立. 政治大. ‧ 國. 學. Figure II-2. Value Created between Producers and Consumers Therefore, the overall goals of the strategy are as follows:. Nat. y. ‧. Source: Tawfik Jelassi and Albrecht Enders, 2008. . Minimize the cost to provide these values,. . Acquire the value creation as much as possible in the form of producer surplus. er. al. sit. Maximize the value creation by raising perceived use value,. io. . n. v i n The above three strategies are the highest in order to form a competitive C h priority conditions U i e h n c gbelongs. advantage in the market to which the company The best ways to get a competitive advantage are product innovation and the process innovation, which the competitors cannot imitate perfectly. According to the Oslo Manual, Innovation can be applied to business practices, workplace organizations or external relationships as an implementation of new or significantly improved products or processes, new marketing methods or new organizational methods. A variety of innovations can be included within this broad definition. Innovation can also be classified more narrowly as an implementation of one or more types of innovation. The definition of technological product and process innovation related with this narrower definition of product and process innovations.52 The introduction of new and significantly improved products in relation to the nature of the. 52. Oslo Manual. Op. cit. -16-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(24) Innovation and Pricing for Small and Medium Enterprises in Korea. product or its intended use creates product innovation. Significant improvements include technical specifications, components and materials, integrated software, user friendliness, or other functional characteristics. And the implementation of a new and significantly improved production or supply method becomes process innovation. This also includes significant changes in technology, equipment, and/or software. The form of value creation created through innovations can not only increase the perceived use value but also reduce cost. The value created in these innovations lead to an increase in the perceived use value.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure II-3. Modified Value Created between Producers and Consumers Source: Tawfik Jelassi and Albrecht Enders, Strategies for e-Business, 2nd edition, Pearson 2008 (Modified by Author). According to Tawfik Jelassi (2004), it's equally important to create better value than the value created by the competition, and to capture some (or producer surplus) of the value generated in the form of profit. Increased value creation by itself does not provide any information about how the value is distributed between consumers and producers, as shown in Figure 3. Through the price the company can charge for a product or service, the company makes this distribution possible. The value generated as two separate entities, the producer surplus and the consumer surplus, is the price. . The profits generated by the company are represented when the company sells the product and are referred to as producer surplus. The difference between the price and the cost of selling a product is called a profit.. . The difference between the maximum consumer benefit that the customer is willing to pay and the price that the customer actually pays for the product is called consumer surplus. Generally, customers pursue the largest consumer surplus they can enjoy, which can -17-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(25) Section II. Literature Review. usually be the largest consumer surplus they can obtain at the same price as other products or at a lower price of similar quality. Now, the following two factors that influence a firm’s profitability are the answer to the overarching question regarding the factors that influence the distribution of value between buyers and sellers: . The market structure and. . The relative level of a company’s value creation.. Thus, the nature of innovation type accomplished by companies, the type of market it belongs to, and the company’s internal decisions, will determine the price of the company’s commodity within the value created. In other words, it can expand value by innovation and decide its pricing based on internal and external factors. This decision is made by the company to make an important decision to determine the magnitude of the value that can be enjoyed in the market. Therefore, innovation and price directly affect the profitability of the company.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -18-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(26) Innovation and Pricing for Small and Medium Enterprises in Korea. 2.2 Pricing Strategy for Innovation Schumpeter (1912) first proposed the economic theory of innovation, which enables innovators to enjoy a temporary monopolistic situation. Therefore, in this case, the company becomes a "price maker" until an imitator enters the market at the moment when attracted to the profit achieved by the innovator53. There are two alternative ways to set pricing of innovation. . The monopolist innovator price or "premium pricing" is based on high cost and acceptance of cost premium for new commodities. This is a common practice in automotive industry where innovation is introduced at the beginning of the line. This is also the dominant practice in pharmaceuticals, electronic components and software industry. In certain hightech markets, this pricing strategy is sometimes called "cream skimming pricing" because consumers are always ready to pay for novelty premiums and become "early adopters.". 政治大. In the case of export markets, different prices may be set, particularly depending on the changes in foreign exchange rates, changes in prices and income elasticity.54. 立. ‧ 國. ‧. . 學. Zantac antiulcer drug, released by Glaxo in 1983, is one of the most famous examples of successful "premium pricing" for patients. Compared with Zametac of SmithKline Beecham, the world leader at the time, Zantac had more convenient dosing schedules, reduced side effects, and drug contraindications. Glaxo decided to charge a premium of 50%, not parity or low price. In four years, Zantac became the world market leader.. sit. y. Nat. Market pricing or competitive pricing considering options to select innovative products and services alternatives and options to balance demand and supply. Cost constraints, consumer's economic satisfaction, etc.. n. al. er. io. In fact, according to Smith and Nagle, the pricing of new products and services is often the result of a "political" decision arising from conflict between strict accounting requirements. The cost covers development and production the price must be sufficiently low for the sale of products, such as the price which is high enough and the vision based on marketing55.. Ch. engchi. i n U. v. According to management science, price is one of many strategic variables. It is also a very complicated problem because consumer expectations and corporate development strategies must be considered as well. Price is customer's signal reflecting an analysis of the value perceived by the product.. 53. 54. 55. Chanaron, J.J., (1990), Innovation Technologique et Developpement economique, Cours d’Economie Appliquee, DGES, Universite Pierre Mendes France, Grenoble. Khalaf, L., Kichian, M., (2000), Testing the Pricing-to-Market Hypothesis: Case of the Transportation Equipment Industry, Bank of Canada Working Paper, 2000-8, May. Smith, G.E., Nagle, T.T., (1994), Financial Analysis for Profit Driven Pricing, MIT Sloan Management. Review, Vol. 25, 3, pp. 71-80 -19-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(27) Section II. Literature Review. 3. Nature of Innovation Over the past thirty years, interest in innovation in the popular press, governments, and business firms has accelerated, creating a crescendo of concern and enthusiasm for innovation. In 1999, The Economist described innovation as ‘the industrial religion of the late 20th century’ 56 . Nowadays, innovation features as a prominent slogan amongst the heads of nations. This part begins with defining an economist who means innovation. Economists have focused on two main types of products and processes. A product innovation that improves the scope and quality of a product is an act to propose a new market.57 For example, compared to Sony Walkman, a portable device that can play music, the Apple iPod is an innovative product.58 Creating new ways of creating or delivering goods or services is called process innovation. For example, there is a new way for a customer visiting a hospital to touch the screen and receive treatment instead of talking to a receptionist. 59 This section shall highlight the basic innovations concept of the stages and process in different types and impacts of innovation.. 立. 政治大. 3.1 Basic Definition of Innovation. ‧ 國. 學. 3.1.1 Introduction. ‧. The Oslo manual60distinguishes innovation into four areas: product, process, marketing, and organization. Although concept establishment has not yet been ensured compared to product innovation and process innovation, marketing and organizational innovation are also wellknown concepts of innovation for many countries and enterprises.. sit. y. Nat. al. er. io. 3.1.2 Defining Innovation. v. n. According to the Oslo Manual, innovation is the implementation of new products or processes, new or significantly improved, new marketing methods or organizational methods in business practices, work organizations or external relationships.61. Ch. engchi. i n U. This innovation range includes a various of possible innovations. Innovation can be classified in more detail when innovation, such as product and process innovation, is implemented.62 The minimum requirement for innovation is that the company need to update (or greatly improve) their products, processes, marketing methods or organizational methods. This. 56 57. 58 59 60. 61 62. Industry gets religion, Feb 18 1999, from: http://www.economist.com/node/186620 Christine Greenhalgh & Mark Rogers (2010), Innovation Intellectual Property, and Economic Growth, Research Policy: Princeton University Press. The nature and importance of innovation, from: http://assets.press.princeton.edu/chapters/s9221.pdf Christine Greenhalgh & Mark Rogers (2010), Op. cit. Oslo Manual (2005), Guidelines for Collecting and Interpreting Technological Innovation Data: Organisation for Economic Co-Operation and Development. Oslo Manual (2005), Op. cit. Oslo Manual (2005), Op. cit. -20-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(28) Innovation and Pricing for Small and Medium Enterprises in Korea. includes products, processes, methods and companies adopted by companies and organizations that companies first developed. The scientific, technological, organizational, financial and commercial phases of innovation can all be called innovative activities.63 Research and development (R & D) activities that are not directly related to specific innovation developments are included. The company that implemented innovation during the period of its review is called an innovative company.64 In order to meet the purpose of this research, only innovation of the product and process is described.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 63 64. Ch. engchi. i n U. v. Oslo Manual, (2005). Op. cit. ibid. -21-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(29) Section II. Literature Review. 3.2 Stages of the Innovation Process As shown in Figure 1, innovation is structured in many steps. The input of knowledge embedded in skilled personnel and special facilities and activities that require time to use these resources are required for each step.65. 立. 政治大. ‧ 國. 學 ‧. Figure II- 4. Stages of the Innovation Process. Source: Rosegger, G. 1986. The Economics of Production and Innovation, 2nd edition. Oxford: Pergamon Press. Nat. y. sit. n. al. er. io. In addition, if each step succeeds, the first to be made in the form of new knowledge is intangible, but it becomes a type after applying for sales, but, when applied to several kinds of service activities, it may remain intangible.. i n U. v. The first step (stage 1-3) is to create basic scientific knowledge, a new process or blueprint plan, or an early prototype type of a new product or process.66 As mentioned as, “invention was made” that created by inventor 's diligence and genius. All these activities are frequently done as R&D, but it represents the pre-market activities by various agencies including public scientific institutions, universities, inventors, and companies. Innovation in second step, stage 4, is only achieved when a profitable product or a new process is reached. 67 This commercialization phase triggers the beginning of another series of events characterized by diffusion (stage 5) involving the spread of market new products or processes. Also, what needs to be understood is that feedback exists between all phases. Innovation is almost progressive.68 When consumers and other companies start to use innovation, they often relay information on how to adapt it or to improve it for companies that innovate69. This type of fine-tuning or 65 66 67 68 69. Ch. engchi. Christine Greenhalgh & Mark Rogers (2010), Op. cit. ibid. ibid. ibid. Rosenberg, N. (1982). Inside the Black Box. Cambridge University Press. -22-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(30) Innovation and Pricing for Small and Medium Enterprises in Korea. incremental innovation is critical because the initial product or process is almost incomplete.70 For single innovation, only some of stage 1 to stage 4 of this figure are carried out in a single company. In many areas of the economy, a new flow of knowledge can be provided by public research institutes and universities to transform businesses into more innovative ways.71 Even when relevant new knowledge is being produced commercially, the activities among companies may be separated. In the fields of biotechnology and medicine, there are specialized companies that conduct R&D in the first and second stages, while other companies provide third-stage examination services of potential new drugs. Finally, the new product that will be successful in the market will play its role in the final market, according to the company contract that all activities will bring.72 This means that as long as appropriate contracts are created and implemented, specialization and deactivation can occur in any part of the innovation process. 73. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 70 71 72 73. Ch. engchi. i n U. v. Christine Greenhalgh & Mark Rogers (2010), Op. cit. ibid. ibid. ibid. -23-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(31) Section II. Literature Review. 3.3 Types of Innovation As mentioned above, there are four types of innovation: product innovation, process innovation, marketing innovation, and organizational innovation. This classification remains as consistent as possible between the prior definition of technology products and process innovations used in the second edition of the Oslo manual.74 This study does not address the marketing and organizational innovations mentioned in service innovation. This study aims to investigate companies related to manufacturing industry. In order to be consistent with the purpose of this research, the following classification method, a more detailed innovation, is taken into account: Innovation for New Product and Innovation for Process. 3.2.1 Innovation for a New Product. 政治大. Innovation creates ‘new to the firm, market, or world’ offerings. Existing literature has long considered a company an important product strategy to achieve a competitive advantage75.. 立. ‧. ‧ 國. 學. According to the Oslo Manual, the interest in whether a particular innovation has already been achieved by another company, or if when a company was first launched in the market, the industry or the world can be described as ‘new to market’ and ‘new to the world’.76. n. al. er. io. sit. y. Nat. This concept is determined by innovations already implemented by other companies or by whether implemented for the first time in the market, industry or world. For companies that are first developing innovation, the result of innovation can be the driving force of the innovation process. 77 Although these new and innovative ideas come from companies, the economic impact of innovation depends on whether other firms adopt such innovations.78 Information can be used to identify innovative developers and adopters. Information can also be used to investigate the diffusion pattern of innovation and to identify the novelty between market leaders and followers.79. Ch. engchi. i n U. v. The ‘new to the firm’ is a minimum entry level for an innovation. If a company is first (or significantly improved in the case of products and processes), it may be a product innovation for that company, but it may already have been implemented by another company. 80 For the above reasons, product innovation related with ‘new to the market’ and product imitation linked with ‘new to the firm’ is the factors that will produce new products in detail as 74 75. 76 77 78 79 80. Oslo Manual, (2005). Op. cit. Garcia, Rosanna and Roger Calantone (2002), "A Critical Look at Technological Innovation Terminology and Innovativeness Typology: A Literature Review," Journal of Product Innovation Management, 19 (2), 110-32. Oslo Manual, (2005). Op. cit. ibid. ibid. ibid. ibid. -24-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(32) Innovation and Pricing for Small and Medium Enterprises in Korea. follows. Product innovation is novel or significantly improved characteristics or intended use, or the introduction of services. Significant improvements include technical specifications, components and materials, embedded software, user-friendly or other functional characteristics. Product innovation can take advantage of new knowledge and technology. New applications and combinations of existing knowledge and techniques can also be based on it. Both commodities and services are used in the term “product”. The introduction of new products and services and the capabilities or user characteristics of existing products and services are greatly improved through product innovation. This thesis will not discuss an innovation contents related to the service. commodities or services that differ significantly from the characteristics and uses of products already produced by the company are collectively called new products. A good example of new products using new technology is the first example of microprocessors and digital cameras.81 The first new product made by combining traditional technology was the first portable MP3 player to combine traditional software standards with small hard drive technology.. 立. 政治大. ‧ 國. 學. ‧. Although there are only subtle changes in the product's technical specifications, the development of new applications for the product is part of the product innovation. On the other hand, changes in materials, parts and other characteristics may lead to significant improvements in the calculation of existing products.82. n. al. er. io. sit. y. Nat. An integral part of the advancement and implementation of product innovation is design. However, product innovation does not include design changes unless including major changes in the product's functional characteristics or intended use. Minor changes to goods or services that are planned as regularly are not innovations, and regular seasonal changes are not innovations.. Ch. engchi. i n U. v. Product imitation also can generate a new product. One approach to ‘new to the firm’ imitation has been less interesting until recently, as a more alternative and more general strategy compared to other innovations.83 Imitation is focusing on companies that mimic the offer of competitors, even though companies develop new ones to the firm, but develop something that is not in the market. In this way, imitators resemble those who follow or imitate pioneers to introduce products to the market. Beginning with (lawful) imitation of products and services, this activity may be more or less original. More detailed examples are listed below.  81 82 83. Clones: sold under the brand name of the imitator still legal copies of the original product. Oslo Manual, (2005). Op. cit. ibid. Luo, Yadong, Jinyun Sun, and Lu Stephanie Wang. (2011), "Emerging Economy Copycats: Capability, Environment, and Strategy,": Academy of Management Perspectives, 25 (2), 37-56. -25-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(33) Section II. Literature Review. In some cases, the clone is more visible because the quality is better than the quality of the original product or much lower.84 . Marginal Imitations: Imitation can modify the marginal elements, develop other designs, reorganize the product, use new alternative materials, or follow other innovations using other manufacturing processes.85. . Incremental Imitation (also known as innovative imitation or technological leapfrogging): In this case, the imitator enters the developing market with very core technology and overcomes existing pioneers.86. . Creative Imitation: They define the most innovative copy of a market pioneer's product. In this case, some of the basic concepts of the original product are changed to create a new application for the pioneer product to meet the needs of the new customer base or enter a new market or new sector.87. However, imitation is different from gradual innovation. Gradual innovation is not an original creative product design of the company itself; it is not a thing of competitors88.. 政治大 It is an imitation alternative that has made a significant contribution to previous empirical 立to treat imitation as a monolithic strategy, neglecting the research, but the literature tends ‧. ‧ 國. 學. richness of imitation. According to previous research, companies may adopt an "improving copy" approach that not only copies directly from the competitor's products but also can produce greater advantages than innovators89. Likewise, some scholars suggest that imitation of products takes two forms, pure and creative90. In "pure imitation", companies clone their products the same as their competitors even their pricing strategy. In "creative imitation", companies change or add new functions to their products based on competitors' original product91.. er. io. sit. y. Nat. 3.2.2 Innovation for Production Process. n. al. Ch. i n U. v. Innovation for production process, or process innovation, refers to its new and greatly improved implementation of production or transportation methods.92 This innovation involves important. 84. 85 86 87 88 89. 90. 91. 92. engchi. Silvio M. Brondoni. (2012), Innovation and Imitation: Corporate Strategies for Global Competition, Emerging Issues in Management, Symphonya. ibid. ibid. ibid. Luo, Yadong, Jinyun Sun, and Lu Stephanie Wang. (2011), Op. cit. Schnaars, Steven P. (1994), Managing Imitation Strategies: How Later Entrants Seize Markets from Pioneers. New York: The Free Press/Macmillan. Luo, Yadong, Jinyun Sun, and Lu Stephanie Wang. (2011), "Emerging Economy Copycats: Capability, Environment, and Strategy," Academy of Management Perspectives, 25 (2), 37-56. Shenkar, Oded. (2010b), "Imitation Is More Valuable Than Innovation," Harvard Business Review, 28-29 Ruby P. Lee, Kevin Zheng Zhou (2012), Is Product Imitation Good for Firm Performance?: An Examination of Product Imitation Types and Contingency Factors, Journal of International Marketing, Vol. 20, No. 3, 116 Oslo Manual. (2005). Op. cit. -26-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(34) Innovation and Pricing for Small and Medium Enterprises in Korea. changes: technology, equipment and/or software. Process innovation may be intended to reduce the unit price of production or shipment, improve quality, or produce or provide new or significantly improved products. Production methods include the technology, equipment and software used to produce commodities and services. Also, delivery method concerns the company's logistics, acquires input, incorporates equipment, software, and technology, delivers commodities inside the company, and delivers final products. Innovation that addresses new and significantly improved technologies, facilities and software in complementary support activities such as procurement, accounting, calculations and maintenance is process innovation. Implementing a new or well improved ICT (Information Communication Technology) is a process innovation to improve the capability and/or quality of complementary support activities.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -27-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(35) Section II. Literature Review. 3.4 Distinguishing between Product Innovations and Process Innovations The distinction between product innovation and process innovation is more distinct in the product. 93 However, it may not be clear to distinguish between production, delivery and consumption in the service. Some guidelines below may confirm the distinction.94 . Product innovation if the innovation involves a new or significantly improved nature of the services the customer receives.. . Process innovation is when the methods, equipment, and technologies used to perform services include a completely new or significantly improved part of the innovation.. . Product and process innovation is necessary if new improvements are required in both the methods, equipment and technologies used to provide customers with the characteristics of services that have changed through innovation.. In many cases, there is only one type of service innovation. For example, a company can provide new attributes of a new service or service to a customer without fairly changing the way the service is delivered to them. Similarly, meaningful improvements in the process, such as reducing shipping costs, may not significantly affect the characteristics of the services sold to customers.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 93 94. Ch. engchi. i n U. v. Oslo Manual, Op. cit. ibid. -28-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(36) Innovation and Pricing for Small and Medium Enterprises in Korea. 3.5 objectives of Innovation Company could start innovation activity for a number of reasons. Their objectives can be related to their ability to learn and implement products, markets, efficiency, quality or change. It helps to identify the incentives and importance of innovation when investigating forces driving innovation activities, such as motivating competition and entering new markets. It is important for a company to know and understand why they innovate. Innovation has the ultimate reason for improving the company's performance. 95 The objectives of product innovation involves improving product quality (value up) and reducing the complexity of product (cost down) in order to increase market share or enter new markets. While the objectives of process innovation involve reducing costs (cost down), improving product quality (value up) and production capabilities, etc. The main incentives for product innovation are competition and demand. The main motivations for product innovation are as follows.. 政治大. 立. Development of new products for encourage short product life spans. . For diversify product portfolios. . Increase in market share.. ‧ 國. 學. . ‧. It also targets several factors to identify key motivations for changes in production and supply. Whether their main intention is to improve quality, flexibility or efficiency/cost savings. In particular, the cost-saving elements are more specific to enable better interpretation. For example, process innovation aimed at improving productivity, a higher level of mark-up over competitors can be included in the commodity price depending on significantly lower production costs or the elasticity of demand. The company can combine lower prices and higher impressions than its competitors to gain market share and increase profits96. If the company achieves product innovation, it can introduce new products, which significantly increases market demand and mark-up, thereby gaining the upper hand in competition with other companies.. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Also, the Oslo Manual mentions which by targeting new markets or influencing the demands of existing products, companies can increase the value of their customers by differentiating their products. For the above reasons, this research strives to grasp the correlation between pricing strategy and SMEs’ innovation.. 95. 96. Schumpeter, J.A. (1934), The theory of economic development: an inquiry into profits, capital, credit, interest and the business cycle, Harvard Economic Studies, Vol. 46: Harvard College, Cambridge, MA. ibid. -29-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(37) Section III. Research Methodology. III. Research Methodology Figure III-1 depicts the hypothesized relationships among the three research components: innovation, innovation objectives, and pricing strategies.. 立. 政治大. ‧. ‧ 國. 學 sit. y. Nat. er. io. Figure III-1. Hypothesized Relationships Among Research Variables. figure III-1 shows the relationship between the variables constituting the hypothesis. Innovation type is a hypothetical independent variable, and its types are product innovation, product imitation, and process innovation. As a dependent variable, the types of pricing include value-based pricing, competition-based pricing, and cost-based pricing.. n. al. Ch. engchi. i n U. v. The innovation objectives, as a moderator, displayed in the process of product innovation is cost down and value up, and this variable is an important variable that connecting type of innovation, an independent variable, and type of pricing, a dependent variable, in this thesis. This section elaborates on the applied research method and design, model, and data collection based on developed hypothesis.. -30-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(38) Innovation and Pricing for Small and Medium Enterprises in Korea. 1. Hypothesis Development Summarizing the theoretical discussion of the previous chapter and examples applied to SMEs of Korea, the following research hypothesis for analyzing the pricing of a commodity is proposed. If a firm launch product innovation, it creates a new product in a market. And it has a monopolistic power over the specific market. No matter the objective of innovation, the firm can apply value-based pricing strategy. According to the discussion above, the following hypothesis can be suggested. H1-1: Firms which achieved the value up through the product innovation would use the valuebased pricing for their pricing strategy.. 政治大. H1-2: Firms which achieved the cost down through the product innovation would use the value-based pricing for their pricing strategy.. 立. ‧. ‧ 國. 學. From the perspective of competition-based pricing, pricing is a tool to achieve sales objectives. In the minds of some managers, this method is “pricing strategically.” Because more market share usually produces greater profit, an organization wants to achieve market-share goals. Priorities are confused, however, when managers reduce the profitability of each sale simply to achieve the market-share goal. Prices should be lowered only when they are no longer justified by the value offered in comparison to the value offered by the competition. If a company accomplishes cost down through the product imitation innovation, then price-cutting should be possible. The goal of pricing should be to find the combination of margin and market share that maximizes profitability over a long term. Godiva chocolates, BMW cars, Peterbilt trucks, and Snapon tools would, without a doubt, gain a substantial market share if priced closer to the price of competitors.97 So, the following hypothesis can be proposed.. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. H2-1: Firms which achieved value up through the product imitation would use the competition-based pricing for their pricing strategy. H2-2: Firms which achieved cost down through the product imitation would use the cost-based pricing for their pricing strategy. It has often been pointed out that process innovation may be particularly helpful or suitable for small firms, since, by this means, they can share an advanced technology developed by larger firms. The adoption of a proven process technology may also have the advantages such as low risk and short-term payback. However, the limitation of depending upon investments in process innovation is that any competitor can easily follow, removing the initial advantage gained from the investment. 98 As process innovation is mainly production oriented, performance consequences are measured using the production process indicators of cost reduction, product 97. 98. Micu, Adrian, Micu, Angela L. (2003), Strategic Pricing, BULETINUL Universităţii Petrol – Gaze din Ploieşti, Vol. LVIII No. 2, Seria Ştiinţe Economice. Process innovation, from: http://www.psi.org.uk/publications/archivepdfs/Small%20firms/SF3.pdf -31-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.

(39) Section III. Research Methodology. quality improvement, ﬂexibility and capacity improvement. However, the specification of product is still same, and the product faces the same competition situation. Therefore, pricing strategy of process innovation is still the cost-based pricing. H3-1: Firms which achieved the value up through the process innovation would use the cost-based pricing for their pricing strategy. H3-2: Firms which achieved the cost down through the process innovation would use the cost-based pricing for their pricing strategy.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. -32-. DOI:10.6814/THE.NCCU.TIIPM.032.2018.F08.