Product life cycle of trade
The Product Life Cycle Theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area where it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.
international product life cycle
The international product cycle is a model that patterns international trade of products. It focuses on the idea of primary benefit and production characteristics. As a product reaches mass production, the production process tends to shift outside of the creating country. The country that generates a product idea often becomes the consumer of that product. Following a failure by Heckscher-Ohlin model to adequately illustrate the pattern of international trade, Raymond Vernon came up with the Product Life Cycle theory.
Raymond Vernon applies two methods in coming up with his theory, the model of labor-saving and capital-using products that cater to high-income groups. The author uses the US to illustrate the changes in the trade market.
Products that are produced and consumed at a new stage are from the US. However, when production reaches the point of mass volume production, most techniques used will be foreign. At the third stage of production, shifts to the developing countries. In summary, this model shows the comparative changes in the trade market. The country that benefits most shifts from a country that comes up with the idea to the country where the actual production takes place.
According to Raymond Vernon, products can be categorized into three stages depending on product life and trade behavior in the international trade market. The first for any producer is to promote a new product in the market. At this stage customers are not aware of the product; hence sales and profits will below. The competition will also be low in the market. At this stage, the popularity of the product in the market will have increased.
The production company has to increase its promotional budget. The number of sales will also increase hence the cost of production decreases. Compared to the growth stage, the increase in the sale volume and demand level is relatively low at this stage. Many consumers are aware of the product and finding new customers is difficult. Even though the number of competitors have increased at this stage, business is still juicy at this stage; everything seems to be favorable to the producers.
Foreign demand will also increase at this stage especially in the developed countries. The increase in foreign demand will see the producer country setting up similar companies in foreign countries. At this stage, competing companies will have taken some portion of the market. Producer companies do their best to attract new customers, but there will neither be an increase nor decrease in the sales volume at this stage.
At this stage, the product begins a downward decline in terms of sales which eventually affects the profit margins. The economic viability of continuing with the business declines drastically. At this point, the company can choose to discontinue the production or sell the company. Another possible scenario is for the production company to shift its business to a developing country.
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In the richest countries, exporting products that are in an early stage of their product life cycle is associated with higher growth rates. In contrast. The International Product Life Cycle Theory was authored by Raymond Vernon in the s to explain the cycle that products go through when exposed to an.
Products, like people, have life cycles. The product life cycle is broken into four stages: introduction, growth, maturity , and decline. This concept is used by management and by marketing professionals as a factor in deciding when it is appropriate to increase advertising, reduce prices, expand to new markets, or redesign packaging. The process of strategizing ways to continuously support and maintain a product is called product life cycle management.
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In , Raymond Vernon published a model that described internationalisation patterns of organisations. He looked at how U.
Product life-cycle theory
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Trade Implication of the Product Cycle
The International Product Life Cycle Theory was authored by Raymond Vernon in the s to explain the cycle that products go through when exposed to an international market. The cycle describes how a product matures and declines as a result of internationalization. There are three stages contained within the theory. The cycle always begins with the introduction of a new product. In this stage a corporation in a developed country will innovate a new product. The market for this product will be small and sales will be relatively low as a result. Vernon deduced that innovative products are more likely to be created in a developed nation because the buoyant economy means that people have more disposable income to use on new products. To offset the impact of low sales, corporations will keep the manufacture of the product local, so that as process issues arise or a need to modify the product in its infancy stage presents itself, changes can be implemented without too much risk and without wasting time. As sales increase, corporations may start to export the product out to other developed nations to increase sales and revenue.
Product managers create marketing mixes for their products as they move through the life cycle. The product life cycle is a pattern of sales and profits over time for a product Ivory dishwashing liquid or a product category liquid detergents.
Most alert and thoughtful senior marketing executives are by now familiar with the concept of the product life cycle. Even a handful of uniquely cosmopolitan and up-to-date corporate presidents have familiarized themselves with this tantalizing concept. Yet a recent survey I took of such executives found none who used the concept in any strategic way […]. Yet a recent survey I took of such executives found none who used the concept in any strategic way whatever, and pitifully few who used it in any kind of tactical way.
In a short essay, discuss the four stages of the international product life cycle.
Product cycle theory shows how specific products were first produced and exported from one country but through product and competitive evolution shifted their location of production and export to other countries over time. Figure 3. As the product and the market for the product mature and change, the countries of its production and export shift. The product is initially designed and manufactured in the United States. In its early stages from time t0 to t1 , the United States is the only country producing and consuming the product. Production is highly capital-intensive and skilled-labor intensive at this time. At time t1, the United States begins exporting the product to other advanced countries, as Vernon classified them. These countries possess the income to purchase the product in its still new-product stage, in which it was relatively high priced. These other advanced countries also commerce their own production at time t1 but continue to be net importers. A few exports, however, do find their way to the less-developed countries at this time as well. As the product moves into the second stage, the maturing product stage, production capability expands rapidly in the other advanced countries. Competitive variations begin to appear as the basic technology of the product becomes more widely known, and the need for skilled labor in its production declines. These countries eventually also become net exporters of the product near the end of the stage time t3.
The Three Stages of the International Product Life Cycle Theory
The international product cycle is a model that patterns international trade of products. It focuses on the idea of primary benefit and production characteristics. As a product reaches mass production, the production process tends to shift outside of the creating country. The country that generates a product idea often becomes the consumer of that product. Following a failure by Heckscher-Ohlin model to adequately illustrate the pattern of international trade, Raymond Vernon came up with the Product Life Cycle theory. Raymond Vernon applies two methods in coming up with his theory, the model of labor-saving and capital-using products that cater to high-income groups.
